Benefits of fixed income option

Home buyers may be disgruntled with the spate of rate hikes by the Reserve Bank of India (RBI). But there are others who are all excited - the conservative fixed income investors. The reigning fixed deposit (FD) rates offered by banks are the highest in recent times. In the current turbulent stock markets and skyrocketing gold price, the lure of assured handsome FD returns is fathomable.

Some banks offer as much as 10 per cent on deposit tenure of one to two years. Most banks offer around 9.5 per cent for three to five year tenures. You must choose the tenure depending on your liquidity requirements, risk appetite and financial goals. Those who have only long-term goals like saving for their children's education or marriage can lock their money in bank FDs that give the highest returns over a long tenure. If you need money in the next one year, select the deposit tenure of a year.

An investor's risk appetite is a major factor that determines his exposure to varied instruments ranging from fixed income to volatile equity. A person with moderate risk appetite may reduce his exposure to equity now and invest in lucrative bank FDs. He still maintains equity investments with the hope that they will bounce back in the coming months and yield manifolds. Senior citizens or the more conservative investors shun market turbulence and prefer to have a large share of their money invested in FDs.

Further, spiraling inflation has compounded the woes of small investors. High food inflation coupled with rising fuel prices has chewed away a large part of the disposable incomes. Technically, returns from FDs in times of high inflation (inflation adjusted returns) aren't so enticing for aggressive investors. However, with the probability of further increases in rates, bank FDs are an option worth exploring.

Fixed income products such as bank FDs that are held for long periods carry with them a formidable reinvestment risk. This risk crops from the uncertainty over future interest rates. What can an investor do when his FD matures and he finds out that the current rates offered for similar products is much lower?

One can invest systematically in fixed income products with different maturities. This technique is called laddering. It not only minimises reinvestment risk but also allows an investor to have cash flows at regular intervals. Parking your entire money in a FD with a fixed maturity date is not advisable. If the interest rates go up, you will be locked in the current FD rate and cannot benefit from the higher rate. On the contrary, if the rates go down you will be glad you locked your money in the FD at a good rate.

Since it is impossible to determine what would be the interest rates after say 2-3 years, laddering is a safe and prudent way to invest in FDs.

Banks offer a higher interest rate on tenures of one to two years. Investors with a low risk appetite will find the assured returns of a fixed deposit attractive in the present market conditions. Long tenure deposits carry a risk – the rate prevailing at the time of maturity and applicable on renewal may be lower than the current rate on offer.

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Get the most out of your fixed deposit investments

One of the main questions for investors in fixed-income instruments is the manner in which they should tackle the present situation on the interest rate front. The Reserve Bank of India (RBI) has recently increased interest rates and this will impact all individuals who are investing in fixed deposits. There is, however, some work that needs to be done before this entire process is completed and, hence, here are some of the steps that they need to take on this front.

Do not rush: One of the first things that the individual has to do is to ensure that they act only after they have all the necessary information with them. The tendency for people is to rush to complete an investment whenever they hear about a specific point and that is something that the investor must avoid at this stage. One of the reasons for this is that while, the RBI has indicated higher rates in the economy, the banks have not yet acted on this in all cases. This could mean a situation whereby the action on the interest rate front could actually be visible after a period of time. This would result in a situation where the rate could change after some time and, hence, if there is a rush to get into the deposit at this stage without checking the bank’s action, then there could be a potential loss of opportunity in the times ahead.

Check bank details: The other thing that the investor must do is to check the position with the specific bank where they are planning to invest the fixed deposit. The details that they need to check is the times when the bank has raised rates and what the present rate for different maturities are and how these actually stand up with respect to the other banks around them. This is important, because, unless, this kind of information is known, there could be a decision made on incomplete information that might not be the best one. This can also give an indication as to when the rate rise can be expected if any and how this will impact them as to when the deposit is to be made.

Think about maturity: The investor also needs to think about the time maturity of the fixed deposit that they will invest in. This is important because they need to make the most out of the situation of high interest rates. The idea for the investor is to ensure that they are locked into the deposit with a longer-term maturity so that they will be able to earn a higher rate of interest continuously for a longer time period. If they choose a deposit with a short maturity, then they could find that they have ended the investment after a short period of time and then, they have a lower interest rate that they will earn from then on.

Existing investments: There are also the existing investments that need to be taken into consideration. If there are existing deposits that are already earning a high rate of interest, then it does not make much sense to do anything with them. However, if there are some that are coming to an end, or, that there is a very low rate of interest on a few of them, then there has to be action on this front. This will ensure that the entire fixed deposit portfolio is in tune with what is required and it is earning a high rate of interest. This kind of alignment will be better for the investor and will help them in their overall efforts.

For More infornmation visit - http://fixeddepositindia.blogspot.com/

[Source- mydigitalfc]