How can fixed income investors benefit from rising interest rates?

In the event of rising interest rates, investors can now get fixed deposit returns that beat inflation, which could not be achieved since April 2022 when inflation was at 7.79%. Thanks to RBI’s boost to repo rate, which has made debt investors fall in love with fixed deposit products, many banks and NBFCs are now offering returns that not only beat inflation but also interest rates from small savings schemes. also give. For example, if we use Shriram Transport Finance Fixed Deposit, regular investors can get an interest rate of up to 8.25%, while senior citizens can get up to 8.75%, which is undoubtedly higher than the inflation rate and by majority is more. of famous small savings schemes like PPF, SCSS, NSC, and others.

For example if we use bank fixed deposits, then HDFC Bank, IndusInd Bank, Yes Bank and Ujjivan Small Finance Bank have recently increased the interest rate on fixed deposits. For deposits maturing in 3 to 10 years, Yes Bank is currently offering the highest interest rate of 6.75% for general public and 7.50% for senior citizens. IDFC First Bank is offering a maximum interest rate of 6.90% for general public and 7.40% for senior citizens on fixed deposits maturing in 750 days. IndusInd Bank is offering a maximum interest rate of 6.75% for general public and 7.50% for senior citizens on fixed deposits maturing in 1 year 6 months to 61 months. Whereas Ujjivan Small Finance Bank offers a maximum interest rate of 8% for older persons and 7.50% for general public. As an example, the above bank fixed deposit investors familiarize themselves with how to lock in their fixed deposits to get inflation-beating returns in the current environment.

But given the rising interest rates, debt or fixed income, investors can be confused about where to invest. Replying to the same Mr. Abhishek Dev, Co-Founder and CEO, Epsilon Money Mart Pvt Ltd. Ltd. said, “What is common between FDs, Debt MFs, RBI bonds and other private or public sector bonds is that they all reflect some kind of debt or lending structure by the respective issuers. In simple words, a bond is a is listed and tradable debt/debt security. Bonds/deposits are generally investment vehicles that would be recommended to an investor who prefers to take on relatively low risk (compared to, for example, equities) and have capital protection and capital appreciation Bonds and fixed-income products are also recommended as diversifiers for investors whose portfolios tend to gravitate towards equities – dividing the portfolio between equities and fixed income. To give a judicious balance.

“Debt MFs are essentially a pool of bonds in line with their investment objectives aimed at providing returns of the underlying assets and further mitigating risk through prudent diversification. Funds with shorter duration and higher credit quality are generally safer than funds with longer duration and/or lower credit quality. Debt MFs however offer funds across the spectrum – both short and long term. It is one of the best ways to invest in fixed income as we all have mutual funds right!” said Mr. Abhishek Dev.

He further added that “the risk assessment associated with investing in these instruments and their returns are closely linked. The principles of high risk high potential returns apply the same way as with any investment. What is added here is the duration of the investment as well.” The longer the maturity of the investment, the higher the potential return for the same issuer.”

Citing some examples of best debt instruments in which investors can consider investing, Mr. Abhishek Dev said, “RBI floating rate bonds with a maturity of around 7 years are one of the safest debt instruments, as the issued The bonds offered are backed by the RBI and are therefore highly unlikely to fail to deliver returns at the end of the bond’s tenure. In this case capital conservation is virtually guaranteed. Then comes an FD or a fixed deposit, which starts with FDs issued by a large PSU bank (i.e. SBI), followed by private banks and corporate deposits. The logic for which is simple that the stronger the bank and its parents, the stronger their balance sheet, the safer your deposits. However, it also means that small private banks or companies pay higher interest rates on FDs to lure investors.”

Raising bond yields is also welcome news for investors looking for debt investments like RBI bonds or small savings schemes. The benchmark 10-year bond rate rose by about 110 basis points from 6.20% to 7.32% between July 2021 and July 2022. Even though the value of your existing bonds may decrease due to rising yields, you can still receive interest payments from your bonds until they mature and continue to generate income.

Using bonds as an example, Mr. Abhishek Dev said, “I am finally making direct investing in bond markets because the investor needs to have a deep knowledge of the issuer’s credit quality, markets, returns, coupons, interest rates etc. Before he can take the plunge.. Remember the old adage of a little knowledge being a dangerous thing. However, for investors who are able to invest large amounts (usually over Rs 1 million per bond) and either have research capability themselves or are supported by their trusted financial intermediary who can assist them in such research, invest a part of their fixed income portfolio directly in suitable bonds. Therefore, if the investor has One can invest directly if he/she has knowledge of the market and is well-versed of the risks involved and adequate resources – otherwise the mutual fund route is preferred.”

However, apart from rising interest rates on fixed deposits, some debt investors may think of investing in government-backed small savings schemes as they offer higher interest rates than fixed deposit rates. Some of the most well-known schemes include the Senior Citizen Savings Scheme (SCSS), which offers an interest rate of 7.4%, the 15-year Public Provident Fund Account (PPF), which offers an interest rate of 7.1%, and the Sukanya Samriddhi Account, Which offers an interest rate of 7.6% which is much higher than SBI fixed deposit rates even after the recent hike by the bank.

The most important information to be kept away from this is that though small savings schemes provide assured returns, interest rates are not fixed as they are determined by the government on a quarterly basis. If we use PPF as an example, the interest rate currently stands at 7.1%, down from 12% in the 1999-2000 time frame. Debt investors who compare fixed deposits and post office savings schemes before choosing an investment may get confused in the face of rising interest rates.

To allay the same concern, Abhishek Dev said, “If you go to the savings pattern, bank fixed deposits are the prime choice among fixed income investment options. The rise in market interest rates has led to a rise in loans and market-linked fixed income investments. Options (ie bonds and floating rate deposits) are well circulated, although the process is the same for most bank deposits and small savings. Small savings are reasonably good investment options for retail investors for their conservative portion of investments. Those that can be locked in for a long period – These are a set of government-managed savings instruments that aim to encourage citizens to save regularly. However, most small savings investment options offer investment limits and lock-in periods. come along.”

He further added that “Fixed deposits, while they come with a maturity period, are easily liquidated when there is an urgency of liquidity – please note that premature withdrawal penalties apply. How much do you invest in FDs? There is no limit to the amount you can invest in. You should also check which bank you are buying a fixed deposit from, generally, the stronger the bank and its parent, the stronger their balance sheet, the higher your deposit amount They are equally safe. Both FD and small savings differ in terms of return potential, tax benefits, cap on investment, etc. In a scenario where interest rates are rising, it is better to invest in a small savings scheme as the interest rate is higher. The rate is revised every quarter – unlike an FD where the interest rate is fixed.”

“However – both have their pluses and minuses, and one should invest in instruments that align with your return expectations and risk appetite. All said, before you invest in any of these options Don’t forget to consider and compare with various bonds (including government bonds) and debt mutual funds, which can be comparable and attractive. Some food for thought!,” Abhishek Dev said.

Disclaimer: The views and recommendations given above are those of individual analysts or broking companies and not of Mint.

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