Russia-Ukraine crisis: Investors are seeking refuge in fixed-income options

RBI's floating rate bond is a safe and long-duration product you may enter into at present

The equity market has turned volatile and may remain so in the short run due to the Russia-Ukraine war and the resultant supply chain disruptions and spike in commodity prices. The next round of volatility is expected to begin once the US Federal Reserve starts quantitative tightening. Many investors are, hence, seeking refuge in fixed-income options.

Rates may rise
Interest rates are likely to rise due to high inflation. “Inflationary expectations have become entrenched in the economy and will not go away in a hurry,” says Sandeep Bagla, chief executive officer, Trust Mutual Fund. Prices of a range of commodities are up. The government’s heavy borrowing programme will also put pressure on interest rates. Bagla says the 10-year G-Sec could touch 8 per cent in a year’s time.

According to Arnav Pandya, founder, Moneyeduschool, “Rate hikes, once they begin, could continue for at least a year.”
Consider age and horizon: The choice of a fixed-income instrument should depend on a few key factors. “One is whether you are a senior citizen. The other is your investment horizon and the period for which you are willing to lock-in money,” says Udbhav Rajeshbhai Shah, investment advisor, iFast Global Markets. Senior citizens have regular income requirements that younger people usually don’t.

Corporate deposits: If you are investing for less than five years, and want better rates than what bank fixed deposits (FDs) are offering, consider corporate FDs. “Stick to blue-chip companies,” says Pandya. Companies like HDFC and Bajaj Finance are offering FDs with returns between 5.65-6.8 per cent for one- to five-year tenure. In comparison, State Bank of India’s retail term deposit rates don’t offer more than 5.50 per cent (6.30 per cent to senior citizens).

According to Shah, investors looking for higher yields may consider the FDs of Sardar Sarovar Narmada Nigam, a Gujarat government-backed company, which offers 5.75-6.5 per cent on one- to two-year FDs.

Small finance banks: Investors may park a part of their money in FDs of SFBs like AU Finance (6.75 per cent on 5-10-year FD). “With the government hiking the limit on deposit insurance to Rs 5 lakh, you will get your money back quickly even in case of a bank failure,” says Shah.

RBI floating rate bonds: The RBI floating rate bond, which offers 7.15 per cent, is another attractive option. “It pays 35 basis points more than the National Savings Certificate (NSC). As interest rates move up, the rate on it will also get revised upward,” says Pandya.

Small-savings instruments: Rates on these are attractive, but you need to watch out for a few things. “They usually have a higher lock-in. In some, like NSC and Public Provident Fund (PPF), interest keeps accumulating and you only get a pay out at maturity,” says Pandya.

Some, like Senior Citizens Savings Scheme (SCSS) and Sukanya Samriddhi Yojana (SSY), are available only to specific demographic groups. Moreover, there are limits on how much you can invest: Rs  1.5 lakh in PPF and SSY in a year, and up to Rs 15 lakh in SCSS.

Prime Minister Vaya Vandana Yojana: Senior citizens should consider this product from the Life Insurance Corporation (LIC), which offers a similar rate as SCSS.

Debt mutual funds: Avoid any fund that has an average duration of more than two-and-a-half years. “Opt for a banking and PSU fund that follows a roll down strategy,” says Bagla. The average maturity, and hence risk, of the fund keeps reducing over time.

Debt fund investors may also consider target maturity funds, where they can lock-in returns by holding to maturity.
Harshad Chetanwala, co-founder, MyWealthGrowth.com, suggests sticking to shorter-duration debt funds, as longer-duration funds experience higher volatility in a rising rate scenario. He suggests that bank FD investors should stick to shorter-tenure products so they can move into longer-tenure FDs once rates have moved up.