Since last one year Indian market has improved from a stage where it was facing inflationary pressure. Due to this change in market trend and lowering inflation rate RBI decided to cut Repo Rates and SLR which had impact on investment sentiments in the market and would indirectly impact the returns from the deposit schemes.
Interest rate cut will have impact on Fixed Deposit (FD’s) and Recurring Deposit (RD’s) investors, as they will receive low return on investment. To make good returns in spite of interest rate cut, it is important for an individual to rebalance his/her investment portfolio. In short, investors who invest in ‘safe haven’ like Bank FD, PPF, RD should look at alternative investment tool.
Investor should determine his/her time horizon for the investments before he/she invest in other instruments. Below is the classification given according to the time horizon, where investors should invest their hard earned money to make good returns.
Ultra Short-Term
If investment requirement is for immediate term, investing in Money Market/Liquid Funds or Ultra Short Term Debt Funds would be ideal instruments to invest. These funds are lower in risk, as they are in Bank Certificates of Deposits, Treasury Bills, and Commercial Papers having a low maturity period, which also ensures proper liquidity. Most of these funds do not have exit load which make this convenient option to invest for a very short term period. The returns are similar to Bank FD’s and RD’s.
Short-Term
For Short-Term investments, investors can divert their investment from traditional Fixed Deposit schemes to Short Term Funds. These funds are low risk debt instruments, which consist of corporate bonds and debentures having a short maturity period. In some funds money market instruments are also added in the investments to add liquidity factor to the investments. Returns can be higher than Fixed Deposits Schemes provided the interest rate is low. There is a lock in period which varies from 30 days to 90 days in most of the funds, where it will attract marginal penalty for withdrawals.
Medium-Term
Some of the investors have an investment objective to achieve in a medium term and to ensure that risk is low they invest in 5 year FD or NSC which give them returns of 8.7% – 9% per annum. However, these investments would always have a liquidity issue, where pre-mature withdrawals are either not possible or it may attract loss of returns. In such case, investor should look at Income Funds which are more liquid and can provide better returns in current interest rate scenario. Income Funds are also debt based funds which aims at providing regular income through their investments based on different debts and money market instruments. They have varied maturity periods. These funds have a one year lock in period, where pre-mature withdrawal attracts penalty.
Long-Term
Investors who prefer to invest in long-Term based deposits with an aim of getting assured returns may face the liquidity risk in their investment. They might lose an opportunity to invest in some other debt based investments which can have similar investment horizon with high returns. In such cases Gilt Funds or Government Bond based mutual funds can be a better investment avenue. Although these funds are long term based but the investment can be redeemed after one year without any penalty. The returns are based on the interest rate in the market, if it remain low can yield higher returns in these funds than other debt based investments.
Table contains alternative investment options for Depositors depending on investment time horizon:
| Ultra Short Term | Short Term | Medium Term | Long Term |
Tenure | 0 – 1 Year | 1 year – 3 years | 3 years – 5 years | 5 years and above |
Instrument | Ultra Short-Term Debt Fund | Short-Term Debt Fund | Income Funds | Gilt Funds |
Investment Contents | Treasury Bills, Bank CD’s and Commercial Papers. | Corporate Bonds and Debentures Government Bonds and Money Market. | Government Bonds, Corporate Bonds, Debentures and Money Market. | Central Government Bonds and State Government Bonds. |
Returns | 9% (One year’s returns) | 9.5% (Three year’s returns) | 8.6% (Five year’s returns) | 8.75% (Seven year’s returns) |
Exit Load | Nil or .25% if withdrawals before 15 days | .25% to 1% if withdrawals before 30 days to 365 days | 1% if withdrawals before 365 days | 1% if withdrawals before 365 days |
Conclusion:
Mutual fund markets have seen a sharp increase in investment in Debt fund since last 6 quarters. So, it is a clear indication that depositors as well as equity investors are looking for alternative investments avenue. Although there are options like FMP’s, which have varied maturity period but due to lack of liquidity it may not be the best option. These debt funds ensure to achieve investment objective as well as higher post tax returns. The returns in the investment are subjected to long term capital gains which would result in high returns than the traditional deposit schemes.
