Is 2024 a year of fixed income investing? How do we decide where to invest and how much to expect in next few months? I want to invest Rs 3-5 lakhs in the coming three months. How should I distribute my money?
Madhuparna Banerjee, Ghaziabad
Reply by Girirajan Murugan, CEO, FundsIndia
We are close to peak policy rates in India and we expect interest rates to decline over the next 12-18 months. This is mainly led by inflation which is under control – the latest CPI inflation at 3.5% is well within the RBI’s tolerance band of 2-6% and the repo rate of 6.5% is comfortably above the projected inflation rate of 4.5% for FY25.
This leaves the real policy rates at an elevated 200 bps giving enough room for RBI to reduce interest rates by 50 to 75 bps over time. The US Fed cutting rates will further encourage RBI to follow suit.
Indian G-Sec yields have broadly remained range bound in recent months and the 3-5 year bond yields remain attractive. For the debt portfolio we prefer funds with short duration(1-3 years) or Target Maturity Funds (3-5 years) and funds with high credit quality (>80% AAA exposure).
If you are looking for higher returns than fixed deposits (FD), have a 1-2 year timeframe and are willing to tolerate higher volatility (if interest rates temporarily rise), you can also consider tactically investing in Long Duration Debt Funds with High Credit Quality.
Historically, during periods of declining interest rates, long-duration debt funds significantly outperform FDs and short duration debt funds. There is a risk that the interest rate could increase temporarily due to unforeseen factors – adverse weather events, food price shocks, supply side disruptions due to geopolitical tensions, volatility in commodity prices, etc. An increase in interest rates can have an impact on funds with high durations.
What are fixed-income investment tools?
Fixed Income Investments refer to financial assets that provide a consistent stream of income on a fixed schedule. They may offer varying payout amounts and are commonly represented by individual bonds, bond funds, Fixed deposits, Post Office Savings Schemes, Company Deposits, Certificates of Deposit, exchange-traded funds (ETFs), and money market funds.
Money market instruments are financial assets that include treasury bills, certificate of deposits, commercial papers, and more. These instruments are considered fixed income securities due to their fixed rate of interest. Typically, they are short-term investments with a maturity period usually not exceeding a year.
In India, fixed-income bonds are sold over the counter and may not be directly accessible to standalone investors. These bonds can typically only be purchased through money market mutual funds.
Fixed Income Investments typically offer a predetermined rate of return, with interest accruing over a specific period. They serve as a means for investors to diversify their portfolios as they pose lower risk compared to derivative instruments and equities. Due to their reliable returns, fixed income investments are particularly favored by retired investors as a stable source of income.
Why choose fixed-income investment schemes
Fixed-income bonds are a preferred investment option for individuals in search of stability and security. They are especially appealing to those with a cautious approach to the stock market and a desire for a safe place to grow their financial assets. Mutual Funds specializing in fixed income securities present a dependable choice for investors seeking stable financial growth.
Furthermore, fixed-income securities are attractive to investors looking for consistent returns and a way to diversify their investment portfolio. By investing in these securities, individuals can secure a steady stream of dividends, even in market downturns when other high-value assets may underperform.
Senior citizens and conservative investors may also find fixed income securities to be an appealing addition to their investment strategy. These securities offer low-risk investment opportunities and predictable returns, making them a suitable option for those looking to explore alternative investment avenues.
It should be pointed out that investing in fixed-income securities may lead to a decrease in the purchasing power of the invested funds over time due to the lack of inflation adjustments. Moreover, investors may forego the chance to benefit from market upswings in the event of a sudden increase in overall market returns.
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