RETURNS offered by safe asset classes like fixed deposits and fixed income funds have varied since January 2008. Interest rates on fixed deposits have fluctuated between six per cent and 10 per cent during this period.
Deposit rates for one-to-two year period peaked to 10 per cent during November-December 2008.
While the lowest interest rate offered by banks was six per cent from November 2009 to August 2010, interest rates are on the rise again. At present, most banks are paying 6.75 per cent interest on one-year fixed deposits.
The interest rate on deposits of one-year maturity at the beginning of the financial year 2008-09 was hovering around 8.75 per cent.
Returns from fixed income funds such as liquid funds, short-term funds, ultra short-term funds, income funds and monthly income plans (MIPs) have also varied.
Fixed income funds are debt funds that invest in instruments such as government securities (gsec), corporate bonds and commercial papers.
During January-December 2008, liquid funds gave returns between six per cent and eight per cent.
Returns dropped to 4-4.5 per cent during the January 2009-April 2010 period. Since April 2010, interest rates have started picking up.
Hence, returns from liquid funds have been in the range of 6-6.25 per cent.
Income funds have performed poorly during the January 2008September 2010 period, reporting returns between 4-4.5 per cent.
Income funds invest in g-sec and corporate bonds.
However, MIPs during the period gave higher returns -between 12 per cent and 15 per cent. MIPs invest 80-85 per cent of the portfolio in debt and the rest in equity.
Partial or a little exposure to equity limits risk of volatility of equity markets but at the same time gives good returns
It is not right to compare returns given by different fixed income products as they are invested in different asset classes.
The maximum holding period in fixed income is about one year.
It is difficult to compare returns of each kind of fixed income funds as they are invested with different financial goals and investment tenures.
