Most investors have been wooed by banks to transfer their funds from fixed income products towards banks that provide interest rates as high as 11.6% for five-year tenure on deposits and bonds. Most banks have launched a series of fixed maturity plans (FMPs), as they lost the listings with SEBI. In order to get listed, they are coming with lucrative deals. They are also taking their short-term debt plans, which earlier focused on institutional investors, to the retail market aggressively.
In order to not lose out on your savings and fall into a debt trap of availing a loan for financing your debts, here is what you can do:
- Maintain a strategic investing approach. As no one can time the market, booking profits in their equity portfolios in time to avoid losses is a bad idea. To save yourself from such decisions, it is best if you could have an asset allocation plan that includes fixed income. By this, the chances of you losing out on all your money are reduced.
- High rates in the market are not always profitable. It reflects the high inflation rate and the volume of funds in the form of home loan etc for the borrowers. Investors holding these fixed income products at high rates today should prepare to hold them till maturity instead of hoping to trade these. Tactical investors should desist from going overboard with their fixed income allocation as they may find it difficult to rebalance their holdings and switch to equity.
- Issuers of long-term fixed income products currently have a compulsion to offer high market rates for their borrowings. After a certain period of time, they might lower the interest rates over time, either as the cycle turns or as their cost of funds threatens to become too high.
- See if your long-term bonds feature a call option, which will help you to retire your bonds early. Track the credit quality of bonds to make sure that protracted high-cost borrowing does not lead to a downgrade in their credit ratings. Stick to short-term offerings rather than riskier long-term bonds since the illiquidity of the market is more.
- If you look to allocate your funds for a long term, taking advantage of a good, long-term deposit rate is a valuable option when weighed against bonds that may be risky. To the strategic investor seeking a larger allocation to fixed income, bank deposits still remain the best bet as the interest rates is not likely to get revised amidst your deposit tenor.