Get locked into debt instruments

With interest rates rising, it is time to get into fixed instruments for a two-three year period

No one expected interest rates to go up now. But it did, due to measures taken by the Reserve Bank of India to contain the free fall of the rupee. This means that interest rates on loans are going up, adding to the misery of those who have taken loans. Fortunately, interest rates are moving up only marginally. But those whose cashflows are tight could face problems.

The only solace is that interest rates may not stay elevated for a longtime, as RBI action is purely temporary and is expected to be reversed in due course.

At this point, borrowing money should be done only if it is absolutely required. It is advisable to postpone all unwanted purchases. Purchases of vehicles or white goods can always be postponed, for instance. Postpone or scale down holiday expenses. Discretionary spends should be reined in. Unwanted spends should be curtailed. Those loans which have to be necessarily taken like - education loans, home loans, personal loans for marriage of self/ close relative etc. can be done after carefully evaluating how much loan would really be required. Even here, one should take the base minimum with which one can get by.

DEBT: HOW TO PROFIT

• Lock into debt instruments with a two-year time frame
• Restrict investment in gold to 5 per cent of portfolio
• Don't expect huge appreciation from property investment from these levels

One should also keep a reasonable amount of liquidity intact. Besides, the liquidity margin, there should be some more investments which can be relied upon for contingencies.

Debt investments
The flip side today is that, the investment rates are good. Banks are increasing their FD rates as they would like to bring in more deposits since the liquidity in the system has dried up. This is good news for investors. Apart from Fixed Deposits, Fixed Maturity Plans (FMPs) have become attractive for investors. FMPs of varying durations from one month to about five years are available. But three-month, six-month and one-year FMPs are the flavour of the season. Three-month FMPs would probably offer over 11 per cent per annum pre-tax returns. One-year FMPs would probably offer close to 10 per cent returns post-tax, based on the yields of the underlying instruments, prevailing at this point.

So, there is a silver lining to the dark clouds, after all. Debt funds have suffered Net Asset Value (NAV) falls and mark-to- market losses in the short-term. But these are expected to be erased when the interest rate cycle turns again. There is nothing to worry for those who plan to stay invested. In fact, this is a good time to invest in debt funds as the NAVs have been beaten down. From a two year or more perspective, this would be a great time to invest.

The situation in the equity markets remains fluid and remains completely unpredictable. The best that can be said is that we are somewhere near the epicentre of our problems. So, there is a chance of things slowly improving from around here, albeit slowly. Do not stop the Systematic Investment Plans as the NAV at which you invest is lower in such dark periods.

Property investment
The other pet subject for most people is investment in gold and property. Property has run up pretty much in the last 8 years and we are probably at the end of the rally. Investors have not realised that. Property prices may not crash; but they can correct or remain stagnant for long periods of time. Investors putting in the money looking for stupendous growth on properties, would, hence, be disappointed.

Gold
Gold is doing well only in INR. In dollar terms it has actually slid from USD 1650 levels a year ago to USD 1370 levels an ounce. Gold is dependent on sentiment. If the risk perception is high gold normally finds favour. Gold continues to be a defensive asset into which, say 5 per cent, allocation can be made. Allocating huge amounts into gold is not a sound idea. Buy gold if there is an end use for it.

The situation is dark. Like we have seen, there are problems and there are opportunities too. But a lot depends on how you are going to maneuver and move ahead during this phase.

The author is Founder, Ladder 7 Financial Advisories