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Fixed income

Friday, 21 February 2014 - 7:53pm IST | Place: Mumbai | Agency: DNA

Background
The starting point while designing any investment strategy is the correct and candid assessment of risk the investor is willing to undertake. Fixed income instruments are ideal for investors who want to attain the twin objectives of growth and stability in portfolio valuation. The Indian financial markets offer a wide range of choices in debt instruments to investors who are looking to invest a significant proportion of their portfolio in debt instruments.

 

Deposits
The first instrument that springs to an investor’s mind while looking for stable returns, is the fixed deposit offered by the banks. The product owes its popularity to the fact that the investor is unaffected by the market movements and the returns are known in advance while the investor retains the flexibility of withdrawal prior to maturity in case of any requirements, though with a penalty of lower than agreed rate. The rates offered by corporate entities on similar deposits are higher by a margin that reflects the additional credit risk of the corporate.

Government securities
The government securities market consists of coupon bearing government securities and State Development loans as well as Treasury Bills. RBI has taken various steps like the Non-Competitive bidding facility and web based order matching systems, to encourage and facilitate participation by small and retail investors. This will not only bring greater depth and width in the market but also provide direct access to investors for this avenue of secure and risk free returns. Investors can hold these securities in their Constituent Subsidiary General Ledger (CSGL) account or demat account.

Corporate bonds
The evolution of the Indian Capital markets over the last few years means that the spectrum of fixed income instruments available to investors in India has expanded significantly in terms of the products availability and the investment horizon. In addition to government securities, investors have a choice of investing money in the bonds issued by the companies owned by government and private companies. The bonds are issued to meet the funding needs of the issuer and designed with different tenors and have in built options for issuer/investors. Depending on their risk profile, investors can choose suitable securities while building their portfolios.

Tax free bonds
The government at times allows select companies to issue tax-free bonds. Investors in tax-free bonds can enjoy benefits on two counts. Firstly the investors can lock in high rate of interest and secondly the bonds are likely to offer capital appreciation when the interest rates fall. These bonds are especially suitable for investors in the higher tax buckets as the tax adjusted return is higher compared to fixed deposits. The government also allows special bonds to be issued by infrastructure companies that qualify for tax deductions.

Inflation indexed bonds
In 2013, inflation indexed bonds were introduced as an answer to the long felt need of investors for protection against inflation. For the conventional fixed rate bonds, the nominal value of the coupon and redemption amount is known at the time of investing but in the real terms the value is eroded with the rising inflation. For the inflation indexed bonds, the Principal component is protected by adjusting the final redemption amount with the inflation, with a floor on the minimum redemption value at the face value of the bond. For the coupon, the investor receives a spread above the inflation adjusted principal.

Finally, for investors targeting a wider distribution of their funds, indirect investments through mutual funds can be employed. Investors can select from the various schemes offered by various mutual funds for investing into the schemes like fixed maturity plans, short term debt funds and gilt funds offered by various mutual funds. These offer diversification across tenors, interest income plans and issuers. Debt mutual funds though much more stable than equities, may not offer guaranteed returns.

Debt instruments can be a useful tool to stabilise portfolio returns and provide alternative avenues to the investors. The range of available instruments has grown in line with the sophistication and awareness of the investors. To create an optimal portfolio, the available instruments have to be carefully weighed on various parameters like pre and post tax returns, liquidity and risk and their suitability needs to be assessed with the specific requirements of any investor.

The author is the SVP and Head Global Markets, Treasury, Axis Bank


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