How should you invest in Debt instruments now

While the current economic and business scenario is rather worrying for most investors, there are also opportunities that present themselves in the current context. If you look at your Debt allocation now, you may be worried about what you should be doing about the low returns that are already there and will possibly get far worse. 

Let us see what is likely to happen in the different types of debt instruments, based on the current situation and what you can do about it:-

  • There will be a secular reduction in interest rates and we will probably get back to the 2004-2005 situation. The one difference from there will be that the rates may not rise again the way it did at that time.
  • Assuming the rates are going to be staying here or get lower in the near future, it makes a great deal of sense to lock in investments now. Look at the ubiquitous FD, Post office MIS or Dynamic Bond funds.
  • Capital protection plans will be a good idea now, look at available schemes from good fund houses and select ones with 3-5 years duration.
  • FMP investment may also be a good idea but make sure you do it in the next month or so and be clear about the return expectations.
  • If you are looking at Debt MF, try the Duration funds with a time frame of 3-5 years. At this point of time, do not go for funds with longer duration.
  • In the present context a return of 7 % or anything more will be quite good if you are going for pure debt.
  • Rates in PPF and SSY will reduce but these are long term instruments and therefore investors should continue with them.

Given that a fair amount of my portfolio is in Debt, what are my plans for it? Let me first say that in 2016 at least, the performance of Debt has actually been better than equity. Here is what I have and how I plan to deal with it:-

  • Tax free bonds give me an interest of 8.9 % now. Even though I am having handsome capital gains from it, I plan not to sell them and keep getting the interest.
  • PPF accounts for me and my wife – I plan to continue both and invest the maximum permitted in 2017 also.
  • My FMP plans have given me pretty good returns, in several cases over 10 %. The ones getting redeemed will need to be deployed elsewhere.
  • As of now regular FMP does not make much sense – I plan to go for Dual Advantage funds, Short duration Debt funds, Balanced funds or MIP.
  • In general, it will be a good idea to invest in instruments which are hybrid in nature and not just pure debt in the next one year.

How you deal with your money is something you have to decide – make sure you understand the entire landscape, listen to sensible advice and take the right decisions.

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