In the last post I had written about the changing landscape of debt investments. Unlike equity, where most of our investment is in the active mode, investments in debt are very often passively done and we often tend not to think much about them. For example, most of us invest in PF in an automatic way and in PPF out of habit. Some of us invest in FD or Post Office schemes as a matter of habit too.
However, with the changing debt landscape, it will be important for us to consider the investment aspects in an active manner now. Just to summarize, the following trends can be expected in the medium term – I am talking of 2016 and the next couple of years.
- Low inflation regime will lead to low interest cycles.
- Small savings schemes from government will get aligned to bank interest rates.
- LTCG indexation will not have the kind of benefits it used to have till date.
- Interest rates may well go down to something between 6 and 7 % in near future.
With the above scenario in place, the following aspects need to be considered:-
- Long term locking at higher interest rates is not really a bad idea. I honestly do not see interest rates being in the 9 % range in the next 5 years or so.
- Ideal instruments will be the ones where you do not have to pay taxes on the income.
- LTCG indexation needs to be examined before deciding on the investment.
- It will be a risky idea to make a play for instruments that are likely to do well in a declining rate cycle, even though short term gains are quite possible.
How much of your allocation should be in debt? Well, with the current turmoil in the global markets it is difficult to say if equity returns will work out anytime soon in the medium term. In case you have a goal coming up in the next 2-3 years, you need to make sure that you will be able to meet it through redemption of debt instruments alone. If you are already having this level of debt investment, great – if not, then allocate accordingly. For people in retirement, it will be critical to ensure that income from their debt portfolio is enough to meet their regular expenditure.
OK so what are the instruments that one should then buy? More on that inn the next post.