With RBI tightening the monetary policy, debt-based instruments are back in vogue.
Debt-based instruments went completely out of favour a couple of years ago when the Reserve Bank of India (RBI) adopted the soft monetary policy. With the RBI tightening monetary policy from the beginning of 2010, things have changed. Higher interest rates are being offered on deposits and debt-based instruments including deposit schemes (bank fixed deposits, post office deposits, company deposits), debt mutual funds, saving schemes (PPF, NSC) and liquid funds are back in force.
Debt-based investment instruments guarantee the principal investment amount, and are risk-free in comparison with equity based instruments. Debt instruments should be a part of every investor's investment portfolio. Inclusion of debt-based investment instruments provides stability to the portfolio and reduces the overall portfolio risk.
These are some debt-based investment instruments available in the market:
Saving schemes
These schemes are completely risk-free and mainly offered by government agencies and banking institutions. These include bank deposits, public provident funds, National Savings Certificates, among others. Most of these schemes offer tax benefits. However, most of these schemes are not very attractive in terms of liquidity (usually these schemes come with a long term lock-in period).
Debt mutual funds
Debt Mutual funds invest the corpus in risk-free government securities and top rated corporate deposits to beget slightly higher returns than bank deposits. There are several types of investment instruments available in the debt mutual fund category. Liquid Mutual Funds are a very good option for short-term investment needs, i.e. to park the money for a short duration.
On the other hand, monthly income plan funds provide an option of regular income. Investors can also invest in debt funds for tax savings, such as infrastructure debt funds.
Gold
Gold ranks high among debt-based instruments and has given good returns over the last few years due to uncertainty at the global level. Experts believe that global financial turbulence has more negative surprises in the near future. As a result, the outlook of precious metals remains positive in a short-term basis. Investors can invest in gold either in the form of gold/silver coins or through the gold exchange-traded funds (ETFs). However, it is important that investors buy these instruments from reliable jewellery shops and outlets. Gold ETFs are very much like mutual funds whose value depends on the price of gold. Usually each unit of gold ETF represents 1 gram or 0.5 gram gold as underlying asset. The units of gold ETFs are tradable in the markets and easy to maintain in demat form.
Hybrid products
There are many hybrid products in the market that offer a balance between risk and returns. Some of these instruments offer a fixed percentage of investment allocation towards debt and remaining into equity, thereby giving an option to the investor to change the allocation based on his needs and market conditions.
Also, there are some innovative products in the hybrid categories that guarantee the principal amount. But the returns are linked to some equity-based milestones including nifty index, returns on top 5 companies, among others. These products are based on the derivatives market. Investors should carefully read various terms and conditions before committing large investments into these instruments.
