As many of my readers will know well by now, I am a great advocate of the 3 portfolio strategy with Debt, Stocks and MF each having an important place. Of these, stocks and MF are typically for the long term and something I will normally not redeem in the next decade at least and maybe even later. Debt is different – in my FI state I depend on it for passive income and use some of this for my regular expenditure.
One of the obvious approaches in debt investments is to understand the interest rate cycle and try to lock investments for a possible longer term, in order to maximise your interest earning out of these. While there is a bit of luck and speculation involved in this, if you are following the economy properly, it is possible to get these signals correct more often than not. A few of the situations in the past years which has really stood me in good stead are as follows:-
- I normally put some amount as FD for my parents so that they get a monthly amount to supplement their income. I consolidated a larger amount in 2015 and locked it in for 3 years at a rate of 9.5 %. Current rates are 7.5 % only.
- Despite several people advising me against it, I went ahead and invested in a big manner in the Tax free bonds of 2013-2014. The rates were close to 9 % and today it gives me an interest to meet nearly 25 % of my annual expenditure needs.
- Our earlier POMIS matured in December 2015 with a rate of 8 %. I reinvested 9 lacs in a joint account with my wife at a rate of 8.4 %. Today the rate is 7.5 % or so.
- In the 2013-2015 period I rolled over most of my FMP schemes as the rates of interest were favourable and it made sense to lock these in further.
- I also invested fresh into many FMP schemes as it seemed a good idea to have investments which locked into government papers at the then prevailing rates.
- I continued my investments in PPF even though the rates kept coming down based on the alignment of Small savings schemes to the market rates. The EEE nature of it plus the possibility of a rate increase when the cycle reverses make it worthwhile.
While all of these were great till 2015 or so, since the last year, with the rates going down steadily with each RBI policy, Debt instruments have become more of a challenge. For all the instruments that are maturing today, one needs to look into alternatives that will give decent returns compared to a pure debt product.
In the meantime however, I am quite happy with the above decisions I had made. The best of them were definitely the investment in Tax free bonds.