Analysis on the status of debt options in the present market conditions
Considerable action was seen on the monetary policy front over the last six weeks. The Reserve Bank of India (RBI) announced sharp cuts in the cash reserve ratio (CRR) and the repo rate. There has been a 3.5 percent cut in the CRR - 1.5 percent cut in the last one month. This is one of the sharpest cuts in key monetary policy parameters in such a short span of time. The intention of the RBI and the government is to ease the liquidity crunch and provide a boost to consumer sentiments by way of low interest rates.
The inflation rate is also coming under control due to the slowdown and dip in the rates of many essential goods such as crude oil, metals and manufacturing products. Softer monetary policy measures are expected to influence the returns from debt instruments, but investors should weigh different options carefully before making any changes in their portfolios.
Outlook on debt options:
Bank FD has given good returns in the last one year due to higher interest rates prevailing in the market. Also, bank FDs are quite safe as they are under the control of the Reserve Bank of India (RBI). Interest rates have peaked as the RBI has started cutting interest rates and signaled a softer interest rate regime in the near to medium terms. Most banks are still giving higher interest rates on FDs as they are looking to raise additional capital, but the time is not far when they will start cutting interest rates on deposits. Low risk appetite investors should hurry to get locked-in at higher interest rates before interest rates start cooling off.
Debt instruments' yield will come down due to the recent rate cut by the RBI. The yields on debt instruments are almost at a peak and the measures to infuse liquidity may keep interest rates in check over the short to medium term. But debt instruments and debt funds are still a good option for investors with a low risk appetite.
The yield from debt instruments will come down slowly and gradually as banks are reluctant to reduce rates sharply. Debt instruments also accumulate capital gains in a falling interest rate (falling yield) scenario. Investments in debt instruments are good options for the short to medium term investor, in the current market situation.
Liquid and liquid plus funds allow an investor to park his money for a short period of time. Pure liquid funds invest in money market instruments, short-term corporate deposits and treasuries with maturities of less than a year. On the other hand, liquid plus funds invest in slightly longer-term paper to generate better returns. Investors with a short-term horizon (15 days to a couple of months) can invest their surplus money in liquid and liquid plus funds.
There are several other innovative debt-based instruments available in the market now. Private banks have come out with these modern debt instruments. The time period is fixed in these instruments and they provide capital guarantee, similar to bank fixed deposits. The returns are linked to some market variables like the Sensex, Nifty etc.
These instruments offer a very attractive rate of return - 12 to 16 percent. However, investors need to look at the target portfolio of investments carefully before taking investment decisions.
Considerable action was seen on the monetary policy front over the last six weeks. The Reserve Bank of India (RBI) announced sharp cuts in the cash reserve ratio (CRR) and the repo rate. There has been a 3.5 percent cut in the CRR - 1.5 percent cut in the last one month. This is one of the sharpest cuts in key monetary policy parameters in such a short span of time. The intention of the RBI and the government is to ease the liquidity crunch and provide a boost to consumer sentiments by way of low interest rates.
The inflation rate is also coming under control due to the slowdown and dip in the rates of many essential goods such as crude oil, metals and manufacturing products. Softer monetary policy measures are expected to influence the returns from debt instruments, but investors should weigh different options carefully before making any changes in their portfolios.
Outlook on debt options:
- Bank fixed deposit (FD)
Bank FD has given good returns in the last one year due to higher interest rates prevailing in the market. Also, bank FDs are quite safe as they are under the control of the Reserve Bank of India (RBI). Interest rates have peaked as the RBI has started cutting interest rates and signaled a softer interest rate regime in the near to medium terms. Most banks are still giving higher interest rates on FDs as they are looking to raise additional capital, but the time is not far when they will start cutting interest rates on deposits. Low risk appetite investors should hurry to get locked-in at higher interest rates before interest rates start cooling off.
- Debt funds
Debt instruments' yield will come down due to the recent rate cut by the RBI. The yields on debt instruments are almost at a peak and the measures to infuse liquidity may keep interest rates in check over the short to medium term. But debt instruments and debt funds are still a good option for investors with a low risk appetite.
The yield from debt instruments will come down slowly and gradually as banks are reluctant to reduce rates sharply. Debt instruments also accumulate capital gains in a falling interest rate (falling yield) scenario. Investments in debt instruments are good options for the short to medium term investor, in the current market situation.
- Liquid funds
Liquid and liquid plus funds allow an investor to park his money for a short period of time. Pure liquid funds invest in money market instruments, short-term corporate deposits and treasuries with maturities of less than a year. On the other hand, liquid plus funds invest in slightly longer-term paper to generate better returns. Investors with a short-term horizon (15 days to a couple of months) can invest their surplus money in liquid and liquid plus funds.
- Other debt-based instruments
There are several other innovative debt-based instruments available in the market now. Private banks have come out with these modern debt instruments. The time period is fixed in these instruments and they provide capital guarantee, similar to bank fixed deposits. The returns are linked to some market variables like the Sensex, Nifty etc.
These instruments offer a very attractive rate of return - 12 to 16 percent. However, investors need to look at the target portfolio of investments carefully before taking investment decisions.
