After two tough years for fixed income investors, interest rates are beginning to look up. But this time around, you need to look beyond the traditional fixed deposits (FDs) to gain more. And here’s how:
Core investment
Deposits should certainly form part of your core fixed income portfolio, whether you want regular income or just want low risk options that will compound. The ₹5 lakh insurance deposit insurance along with a mechanism for faster resolution (refund within 90 days of moratorium) now gives confidence for you to look at slightly higher earning options in small finance banks (SFBs), beyond the top tier banks.
Interest rates as high as 7.4-7.7% for less than 18-month deposits are not uncommon in such banks. And with top tier banks such as SBI also increasing rates to closer to 7%, those can still be part of your core investment to lend safety.
But here’s the catch. Long-term bank deposits don’t necessarily come with higher interest rates. Clearly, banks do not want to lock into higher rates to repay you, even if you wish you could! Hence come the other alternatives.
Sovereign guarantee
For senior citizens, options such as the Senior Citizens’ Savings Scheme remain among the superior income generating schemes with capital guarantee. For others, the RBI Floating Rate Savings Bond also remains a good option to gain regular income.
But there are other options beyond this that are missed. This comes from G-Secs (government securities), treasury bills and State Development Loans (SDLs) auctioned on behalf of the government by the RBI.
Based on the government’s borrowing calendar, these issuances are available almost every week and sometimes more than once a week. They are best done through the RBI retail direct platform in which you can open a fully online account for free and transact for free.
Treasury bills are mighty useful when it comes to investing in less than 1-year period with 100% safety. Most deposits and savings accounts have low rates for 3 months to 1-year duration, with rates ranging from 4.5% to 5.5%. But treasury bills come in at 6.36-6.92% (auction as of October 22, 2022) for 3 month-1-year periods.
When it comes to medium duration — SDLs offer great rates between 3-7 years (yields of issuances ranged from 7.46-7.72% as of October 22, 2022).
While individual states may have varying degrees of credit worthiness, the repayment is done by RBI and therefore you can assume that there is safety in your capital. These instruments carry half-yearly interest pay outs and are ideal as buy-and-hold instruments. While they can be sold in the secondary market, not all of them will have sufficient liquidity.
And of course, for 5–10-year periods, G-Secs or gilts as they are called, offer good rates between 7.43-7.5% (as of October 22, 2022). While you might think this is lower than what some banks offer, remember that banks offer such rates for shorter periods while these government instruments allow you to lock into current high rates for longer periods. G-Secs and SDLs carry sovereign guarantee with the option of liquidating ahead in the market, if you wish to.
In all these instruments, you need to understand that the coupon rate (interest mentioned) is not the primary return metric to look at. The yield (which will be indicated on the portal and will be confirmed once you get allotment) is important. Yield is nothing but the interest income you get divided by the price at which you buy. That is the real return you gain.
Growth options
The options mentioned earlier generate income for you. When it comes to growing capital, mutual funds can help. Passive debt fund options free you from the hassle of looking for a good fund manager or changing funds when performance suffers. Target date maturity funds (passive funds with a fixed maturity date), provide a fixed term even as they allow you to take your money out anytime. In other words, they are open ended and have no lock-in unlike a fixed maturity plan (FMP).
They come in the form of ETFs, fund of funds and index funds. These mostly invest in SDLs, G-Secs, AAA-rated PSU instruments or a combination of these. They too allow you to play the 2–10-year time frame. This option provides good opportunity to lock into current yields — ranging from 7.25% to 7.7% (again, as of October 22) for periods ranging from 6 months to 10 years.
Whether you wish to generate income or lock into attractive rates, this may be the time to do it!
(The writer is Co-founder, Primeinvestor.in)
