Safe and decent return debt instruments - are there any?
TLDR: In the poor interest rate environment, where can we generate some interest income
The stock market across the globe is on an upward tear given the easy money policies that have been introduced by the central banks across the board. The current super low interest rate environment there are very few venues to generate any meaningful return.
The low interest rate is a good for anyone borrowing. I refinanced my mortgage at a floating rate of 3 month SIBOR ( Singapore Interbank Borrowing Rate) + 0.4%.
So my overall mortgage rate is currently at less than 1%. I am not complaining, it is good to be a borrower at such a rate. But the investor in me is a little concerned.
All in on Equity
So what are my options? Should I go all in on equity to generate good returns? I have been skeptical of investing more than my regular SIP / DCA into equity for sometime now. The market exuberance has no link to the reality of the economy in my humble opinion. The wall street and market street are living in two separate realities. The GDP has had the sharpest drop in the last 100 years because of COVID be it in US, Singapore or India. You will never guess that looking at the benchmark indexes.
Most of the stock market indexes are at all time highs or close to all time highs. So I have no intention of increasing my equity allocation in the current situation. Having said that, I am not stopping my SIP / DCA, those will continue no matter what the market situation is.
DO NOT STOP SIP / DCA , as you cannot time the market. Stay invested and continue investing through the ups and downs
Commodities
So commodities is the next option? Gold or silver might be a good hedge given the current situation. I have always insisted on maintaining a small position in commodities (around 5% of your portfolio) as an inflation hedge and a fall back for uncertain times.
But gold (to a lesser extent silver) have already run up quite a bit this year.
It might be too late to enter into new positions of gold given the run up, I might still consider silver once it corrects a little.
But neither gold or silver are interest bearing and are not income replacement products that I would consider at this time.
Sovereign gold bond issued by government of India might an alternatives for a few, but you will need to hold the bond to maturity as the secondary market is very illiquid and you will lose money if you want to sell it in a hurry.
Fixed deposit
The safe harbour investment for the most conservative investors - a fixed deposit in a nationalised bank in India. The good old days of 7 to 8% interest on a one year FD is long gone. Most bank interest hover around 5 to 5.5% currently for 1 year deposits which is currently lesser than inflation in India. This is still a potential option for people who are super conservative and are worried about capital preservation rather than income generation.
But I would not recommend this option if you are already in the higher tax bracket because of TDS and effective returns being even lesser.
Debt mutual funds
That leaves us with debt funds, with the controversy surrounding debt repaying by several corporate entities and wind down of Franklin Templeton debt funds the industry is on shaky grounds. If you are only looking to park funds for a short term, I would still recommend leaving it in a short term FD or high interest savings account.
Also I would not venture beyond overnight and liquid funds. Anything longer duration puts you at risk given the current market situation and the general unreliability of corporate debt issuers and poor transparency in the market.
Gilt funds was an option if you had got in earlier, you could have reaped more than 10% annual returns, I don’t think new inflows will generate that return anymore given the interest rate environment.
Bharat Bonds
I have slowly added to the Bharat bonds as a part of my debt investments as a mutual fund.
It is a FoF (fund of fund) wrapper around Bharat Bond ETF with different maturities (2023, 2025, 2030 etc) in its own fund. It is super cheap - expense ratio of 0.1% and invests only in AAA rating government companies (effectively backed by government). The returns are slightly better than FD. You also benefit from indexation.
I feel that it is viable alternative to FDs and comes with the implicit backing of the government.
Conclusion
There are obviously other alternatives - RBI bonds, NSC, PPF and other schemes offered as debt alternatives. Most of them are not available to NRIs so I have not explored them in much detail to make informed opinion of them. Please do your own research if you feel those are better alternatives for you.
Good luck and Happy Investing.
