India Inc is in the mood to borrow and that is good news for investors in the debt market
June is not the month for the debt market to get active, as generally in the past, such activities were reserved for March, the last month of the financial year. Bankers pushed their clients to park money in fixed and bank deposits, or to refrain from withdrawing large sums from bank accounts, around March 31, to present a healthy balance sheet. But, the debt market has been buzzing with activity in the month of June, thanks to the funding needs of the corporate sector. A good chunk of this perked up demand for liquidity has been attributed to the 3G auction closure. The good news is that borrowers are looking for fresh avenues too.
Fixed maturity plans
The mutual fund industry has been quick to lap it up, and there have been a slew of fixed maturity plans (FMPs) from the fund houses. Interestingly, the action has centred on 90-day and over one year tenures in the last few months. The indicative yield has been in the range of 6.5 percent for short term FMPs, which is a good one percentage point higher than bank deposits. It may not take long for banks to step up the rate on fresh deposits considering that interest rates are likely to move upwards in the near to medium terms.
While there has been talk about a rate hike for some time now, banks were pushed to maintain a status quo, particularly with their lending rates. Now that the inflation rate has refused to cool down, one can expect the central bank to signal a rate hike in the forthcoming policy. Prior to the 3G auction, the liquidity position too had begun to get comfortable which enabled the central bank to keep the rates low.
Fixed deposits
Individual investors, of course, need not worry much about auctions and instead, can focus on the impact on the deposit rates. The good news for them is that there is increased activity on the debt front and even the corporate sector has joined the bandwagon. A number of manufacturing companies have come up with deposit mobilisation announcements with a rack rate of 10-11 percent. Investors can use the opportunity to reinvest their debt portfolio in some of these papers with good credit rating.
Monthly income plans
In addition, prospects are looking good on the monthly income plans (MIP) front too with mutual funds enjoying the unusual benefit of good equity and debt market conditions. With interest rates looking up for the short term portfolios, most fund houses have managed to deliver double-digit returns on their MIPs. The asset range for the product too is getting interesting with a few funds including other assets like gold. As a result of improved prospects, a few funds have already begun to increase the monthly dividend payout to the seven percent range in the last couple of quarters.
However, investors need to be cautious and should look at a regular review as MIPs too have turned volatile in the past, particularly during a market meltdown. While the product is a necessity (at least some portion needs to be allocated to it) to counter inflation pressures over the long term, those depending on a regular cash flow should consider it a part of aggressive allocation.
Balanced funds
The more aggressive ones can go in for balanced funds with a 2-3 year view as the medium term outlook is promising for the equity markets. While balanced funds have the ability to generate double-digit returns, they also carry a risk component. The fact that they are treated on par with equity instruments for taxation is a reflection of this argument.
Irrespective of the products chosen, the current situation is once again looking up for debt investors. Though the returns are unlikely to climb back to the 9-10 percent level in the near term, they are looking better than the 4-5 percent level they were in.
