Fixed deposits back in limelight

MUMBAI: Uncertainties in the bond market are giving risk-averse clients the jiiters. The advice given by some investment consultants to these clients, who want to park their money in debt instruments: ‘‘Go back to traditional products like FDs, postal saving schemes and senior citizen schemes.’’ Thanks to the uncertainties in the bond market due to a lack of clear direction on future interest rate movement, these experts are asking clients to keep off debt mutual fund schemes.
‘‘We have been asking clients to stay away from debt schemes for the time being. If you are going to park money in a debt scheme for two or three years in a short-term fund or liquid-plus funds, you can hope to get only around 4.0-4.5%,’’ says Kartik Jhaveri, director, Transcend Consulting. ‘‘It seems like rates are going to tighten soon and long-term bond yields are likely to go up. If you are holding medium-to-long-term debt, you are likely to face losses,’’ he adds. ‘‘The advice is based on expectations of a interest rate hike. If the rates go up, debt schemes may give negative returns,’’ says Mukesh Dedhia, director, Ghalla & Bhansali Securities. ‘‘If you put money in a fixed deposit or similar avenue, you are at least assured of a fixed interest on maturity,’’ he adds.
According to experts, nobody want to take a call on interest rates — though many expect it to go up anytime — as they are not sure when RBI would start tightening its policy rates. ‘‘Everybody knows that the RBI would start hiking rates soon, but when will it eventually happen, nobody knows. Even if it happens, we don’t know whether interest rates would go up immediately, since there is no great demand for credit at the moment,’’ says a senior debt fund manager, who doesn’t want to be named.
‘‘Even if the RBI hikes rates by 50 basis points (100 bps = 1%), there won’t be much impact on rates. But that is a theory, we don’t know if it will pan out,’’ he adds.
Despite the odds, Dedhia says he would still recommend long-term debt schemes to investors who are ready to park money for three to five years, as he expects the yields to even out in the long term. Also, he says he would recommend laddering technique to investors to ride varying yields over a period.
For the uninitiated, laddering (similar to SIP —in equity) advocates investing money in debt schemes at regular intervals. ‘‘If you park your money anywhere at one go, it will also come back as a chunk at some point in future. That means it carries a reinvestment risk. You have to invest the money again at whatever avenue and rate available for you at that point of time,’’ say Dedhia. ‘‘But if you spread out your investment over a period of time, you can invest at different yields prevailing at that time. It will average out your returns, also the money wouldn’t come at one shot,’’ he adds.