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Debt options for risk-averse investors

 The Reserve Bank of India (RBI) continued with its monetary policy tightening measures. It raised the policy interest rates (repo as well as reverse repo) by 50 basis points. The revised repo and reverse repo rates stand at eight and seven percent respectively.


   This move means the interest rates will go up further on loans as well as deposits. The interest rates have been going up slowly since the last one year as the RBI is tightening the monetary policy. The rising interest rates change the investment landscape for investors. The potential of debt instruments has gone up over the last few months due to the higher returns as interest rates are going up. In the current market conditions debt instruments are safer. On the other hand, the potential of equity based investment instruments has come down due to the sluggishness in industrial growth in the current high interest rate regime. Also, theoretically, equity valuations go down when interest rates go up as the expected rate of returns from equity instruments go up.


   Investors with a low to moderate risk appetite should look at increasing their portfolio allocation to debt-based instruments.
   

These are some debt-based instruments available in the markets:

Saving scheme


   Saving schemes are risk free with respect to the principal amount and also promise to deliver good returns in terms of interest. Savings schemes include various bank deposits, provident funds, public provident funds, National Savings Certificate etc.


   The returns net of tax are attractive under most of these schemes as they offer tax benefits. However, most of these schemes are not very attractive in terms of liquidity as usually they come with a long-term lockin period.

Debt-based mutual fund

Debt funds invest in various government bonds, securities, corporate fixed deposits and debentures. Since the interest rates have gone up, debt-based mutual funds are expected to offer better returns. There are various flavours available in the market with respect to investment horizons and risk-returns balance.


   Liquid mutual funds are a good option for a short term where you need to park your money for a short duration. On the other hand, if you are looking for higher returns go for balanced funds.

Structured products    

There are many innovative and structured products on offer. These products promise a balance of risk and returns. Some of these instruments invest a fixed percentage of the investment corpus in debt based instruments and the remaining in equity-based instruments to balance the overall risk and returns.


   Some other innovative products in the hybrid category guarantee the principal amount but the returns are linked to some equity based milestones such as the Nifty index, returns from top five companies etc. These products are based on the derivatives markets.


   You should read the various terms and conditions carefully before committing large investments to these instruments.

Debt looks good


   Debt instruments are looking more attractive in the current market conditions as their yields have gone up due to the interest rate hardening. On the other hand, uncertainty in the global markets, weaker outlook of the corporate sector and stretched valuations in equity has tilted the risk and returns equation towards risk for equity based instruments.


   Therefore, individual investors should review the various aspects of their investment requirements - objective, horizon, risk appetite etc - and make the required changes to ensure a balance between risk and returns.

 

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