Fixed income will grow in 2011...Know why?

2010 has been a tough time for those living on fixed income investments. Rising fuel and food prices have increased inflation and the middle class is struggling with its monthly finances. With inflation moving up due to rising commodity and oil prices, the central bank may be forced to increase rates in the near future despite already raising it six times in 2010. So, what should a fixed income investor do in such a situation?


Bank Fixed Deposits: Around 55% of Indian savings find their way to bank fixed deposits (FDs). The simplest of all investment products, a bank FD is easy to operate. All you have to do is walk in to your friendly neighbourhood bank and open an FD. In case of bank FDs, the Deposit Insurance and Credit Guarantee Corporation of India guarantees repayment of Rs 1 lakh in case of default. A point to be noted is that different banks offer different rates on FDs.

Post Office Schemes: The schemes offered by the post office give guaranteed returns and are attractive investment options. These schemes find favour with investors who are looking for sovereign guarantee. Interest rates here are fixed by the Government of India, and do not change often, unlike bank deposits. So, even though banks have revised deposit rates upwards, post offices are yet to follow suit.

Employee Provident Fund: EPF is a retirement benefit provided to the salaried class. Every month a small amount is deducted from your salary which is invested in the EPF account, with the employer also contributing a similar amount. On September 15, 2010, the Employees’ Provident Fund Organisation raised the interest rate by 1% for 2010-11 to 9.5%. This figure is the highest in the past five years. Liquidity is an issue in this and partial withdrawal is possible but only if you have completed five years of service.

Company Deposits: These are unsecured instruments. Their safety depends on the financial position of the company. Hence, investors have to be very careful while choosing a company. High returns come with higher risks. So, take the trouble of checking the company’s credit rating.

Mutual Funds: Mutual funds are preferred by investors as they score on liquidity and the tax front. There are various products available in this category, including fixed maturity products (FMPs), liquid funds, short-term bond funds and gilt funds. Dividend income from mutual funds is tax-free in the hands of investors. Based on your time horizon and interest rate view, you choose products. Debt funds have a fairly wide range of schemes offering something for all types of investors. Liquid fund, short-term income funds, gilt funds, income funds, fixed maturity plans (FMPs) and hybrid funds are some of the more popular categories.

Non-Convertible Debentures: Recently some companies have come up with these offerings. There has been a mad rush of late among investors for such instruments. Along with the higher rate of interest, investors are also drawn to NCDs as there is no tax deducted at source on the coupon. The tenure of these bonds varies from company to company. Some of them may have a put/call option involved. These debentures are listed on the National Stock Exchange, but liquidity is poor. Investors will have to consider these on a case-to-case basis as and when they hit the markets.

So, What Should You Do In 2011?: Investors would do well to choose products depending on their liquidity requirements and risk appetite. Typically investors should divide their portfolio into short-term debt and long-term debt. Around 20-30% of your money should be kept in liquid products such as short-term funds or liquid-plus funds , while another 50% could go into bonds, company FDs and post office products, with the balance 20-25% going into your employee provident fund or public provident fund (PPF).

Source :ET