Don't play with debt portfolio

The recent corporate defaults have started a search for a safe investment option. The Covid-19 virus scare has only accelerated this search. Yet in the middle of all this there is the question – how to increase returns of the low-risk portion of the portfolio. This Dil Maange More attitude from investments is hazardous for their financial health.

 

Any investment can be evaluated on the three primary parameters – risk, return and liquidity. These three parameters are inversely linked. If you need low risk, it necessarily comes along with low returns. Risk remaining the same, if you are willing to sacrifice liquidity, you can get a relatively higher return. Only the government can upend this formula to some extent by providing higher returns on some of its schemes (which are low risk because the government guarantees them) where it serves a useful purpose, such as Senior Citizens Savings Scheme (SCSS).

 

So, investors, especially senior citizens, need to evaluate their needs carefully. Any attempt to increase returns should be viewed in terms of the risk it adds from, say, a fixed deposit with State Bank of India (SBI) which goes at around 6-6.50 per cent. For senior citizens who do not mind the lock-in of their funds for a year or so (and some charges for premature encashment after that), the governments SCSS providing an interest rate of 8.6 per cent makes eminent sense since it adds more than 2 percentage points a year with no increase in risk and only a one-year impediment in liquidity. The maximum amount that can be invested is Rs 15 lakh.

 

Another scheme that can be considered is PM Vaya Vandana Yojana (PMVVY) offered by LIC, with backup support from the government of India. Maximum investment allowed is Rs 15 lakh. This provides 8 per cent pension per year for 10 years. Money can only be withdrawn under exceptional circumstances like treatment of critical illness for self or spouse. However, loan is allowed after three years for 75 per cent of the value such that most of the pension will go in paying interest on the loan and you will get back your amount on maturity. So, there is a higher degree of compromise on liquidity, but the return is good for no additional risk.

 

For those not eligible for these schemes or who have exhausted their limits under both the plans, my advice is quit looking for incremental return in the portion of your portfolio reserved for low-risk investing. Stick to bank fixed deposits with public or large private sector banks. If your tax rate is high (taxable income in excess of Rs 10 lakh), look at banking & PSU debt funds or liquid funds from the larger fund houses. You can look at the Bharat Bond fund of funds. The chance that any investments made by these schemes will default on maturity is low. Don’t play around with the low-risk portion of the portfolio.

 

The writer is a Sebi-registered investment advisor