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As the market moves to 2023, a certain amount of capital preservation is required. Investors should do a little more research, talk to investment advisors, and maybe get some exposure.
There is a saying ‘hope for the best but prepare for the worst’ and perhaps the way to prepare for things not going as they are in 2021 is fixed income. That’s the solution, really. The investors have lived in this Tina type of environment so they are very comfortable investing in equity – there is no other option but stocks. But now one is reaching a point where fixed income instruments are attractive. They are vying for attention and vying for fluid.
How have interest rates on various fixed income instruments moved?
From call rates to repos to three-month, six-month, one-year commercial paper (CP), one is basically getting anything between 6 percent and 8 percent now. If one compares these rates to what they were on March 31, 2022, they averaged anything between 250 and 300 basis points (bps). So a pretty big jump has been made.
So where to invest?
There are many ways to invest in fixed income instruments. There are public provident fund (PPF), post office savings, tax free bonds, fixed maturity schemes, but there are also debt mutual funds, which is probably the best way to go.
In debt mutual funds, there are options available. So, the first is an overnight fund or liquid fund. This is usually a product like a savings bank account. A person has excess money, he keeps it there, spends it when needed. Investment duration is usually between one and seven days. Invests in overnight securities.
One would like to sort to increase the time horizon slightly. There are money market funds and money market funds, depending on the definition – Reserve Bank of India (RBI) rules do not allow you to invest in assets with a maturity of more than 12 months.
They invest in things like commercial paper, certificates of deposit, treasury bills, etc. And looking at what the funds are spending here, the average is 6.75 percent. A little longer duration funds – these are plans up to one year. They fall into low duration funds. They invest in all kinds of things – bank CDs, CPs, T-bills, G-bills, state government bonds, etc.
The return here is mostly in line with a one-year certificate of deposit, which is 7.5 to 7.6 percent or more. So now a person is reaching 7.5 and above and then he has a category of one to three years, which is about 7.5 percent in terms of returns.
But the point is that a person does not know how to climb the expressway. So, there is always an option to invest in a one-year fund or a three-year fund and then invest again. In the long run, if one thinks they are making the same or better profits.
From the point of view of debt mutual funds, tax is applied only on capital gains. Compared to investing directly in bonds, there is a higher cash flow. Many of them are very liquid instruments. And of course, there is also the investment horizon, which is extremely flexible, because, when one wants to call, there is liquidity, one can sell these units and redeem them at will.
So, a certain amount of capital preservation is to keep one’s radar on as the market heads into 2023. One needs to do a little more research, talk to investment advisors and maybe get some exposure.
For more, see the attached video
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