- Date : 06/03/2023
- Read: 4 mins
Are you aware that currently, we live in volatile and uncertain times? Are you aware that fixed-income instruments can come in handy for investors to earn returns without risk? Read to know more.
As the global economy slowly recovers from the pandemic, there is a renewed interest in fixed-income investments. With returns turning real, investing in fixed-income products is now an attractive option for investors. Fixed-income investments provide a steady stream of income and are less volatile than other investment options. This article discussed the merits of investing in fixed-income instruments over equities.
As the discussion surrounding the relative merits of stocks versus bonds intensifies, wealth managers are urging clients to increase their investments in bonds and deposits. These fixed-income products are now demonstrating returns that surpass inflation. Given that stock prices are currently high and stock markets volatile, financial advisors believe it would be wise for investors to adopt a more cautious approach to asset allocation in the near future.
Also Read: To understand markets
Inflation Vs Return on fixed-income instruments
In December, wholesale inflation dropped to 4.95%, while consumer inflation remained at 5.72%. At the same time, bank fixed deposits are offering returns of between 6.25% and 7.25%, depending on the length of the deposit and the size of the bank. Corporate deposits also have varying returns, ranging from 7.6% to 8.95%, depending on the credit rating of the issuer and the deposit term. Bonds issued by the Reserve Bank of India are currently providing a yield of 7.35%.
Taking inflation into account, the real return based on December's consumer inflation rate is at least 55 basis points, or 0.55%. This is due to a decrease in inflation figures and interest rates remaining relatively high. It's worth noting that fixed-income investments have not generated real returns for over a decade.
Harshvardhan Roongta, chief financial planner at Roongta Securities, stated that fixed income returns are currently exceeding inflation and that the current returns of 7-7.25% make it an attractive asset class that investors should not ignore.
As interest rates have increased, fixed-income investments have become more appealing, while equities have faced challenges after a long period of above-average performance. The Nifty index has yielded a return of 1.5% over the past year. Many experts believe that Indian stocks are overvalued in the current global scenario.
The Nifty 50 has a higher Price to Earnings (PE) ratio, a commonly used measure of valuation, at 21.7 times, compared to the 11-14 times of other emerging market peers. Meanwhile, China's Shanghai Composite is trading at a more affordable 13.37 times PE ratio.
Kunal Vora, head India equity research at Securities, maintains a cautious outlook on Indian equities. He believes that the lag effect of interest rate hikes could weigh on global growth, even though the worst of inflation seems to have passed. Furthermore, he notes that equity valuations currently appear rich, and that whenever the yield on bonds and earnings have been wide, as is the case now, market returns have usually been under pressure in the following year.
Also Read: To know about various kinds of mutual funds
How should investors invest?
Investors who are uncertain of how much they should allocate to equity and debt could consider investing in hybrid mutual funds like balanced advantage funds or equity savings funds, which determine their exposure to stocks and bonds according to market conditions.
Many balanced advantage funds, which utilize a combination of debt, equity, and arbitrage strategies based on market valuations, currently have allocated between 30% and 50% to equity in their portfolios. Similarly, equity savings funds have an allocation of 15% to 40% to equity, with the remainder of the portfolio consisting of a mix of arbitrage and debt.
For investors whose income falls in lower tax brackets, a combination of RBI bonds and corporate deposits may be a more suitable choice for investing additional funds.
Also Read: To know more about various investment options
Fixed-income investments are an attractive option for investors right now, providing a steady stream of income with less risk than other investment options. With returns exceeding inflation and equity markets highly volatile, investors should reassess their asset allocation strategy and consider investing in fixed-income products such as bank fixed deposits, corporate deposits and bonds issued by the Reserve Bank of India.
As the global economy slowly recovers from the pandemic, there is a renewed interest in fixed-income investments. With returns turning real, investing in fixed-income products is now an attractive option for investors. Fixed-income investments provide a steady stream of income and are less volatile than other investment options. This article discussed the merits of investing in fixed-income instruments over equities.
As the discussion surrounding the relative merits of stocks versus bonds intensifies, wealth managers are urging clients to increase their investments in bonds and deposits. These fixed-income products are now demonstrating returns that surpass inflation. Given that stock prices are currently high and stock markets volatile, financial advisors believe it would be wise for investors to adopt a more cautious approach to asset allocation in the near future.
Also Read: To understand markets
Inflation Vs Return on fixed-income instruments
In December, wholesale inflation dropped to 4.95%, while consumer inflation remained at 5.72%. At the same time, bank fixed deposits are offering returns of between 6.25% and 7.25%, depending on the length of the deposit and the size of the bank. Corporate deposits also have varying returns, ranging from 7.6% to 8.95%, depending on the credit rating of the issuer and the deposit term. Bonds issued by the Reserve Bank of India are currently providing a yield of 7.35%.
Taking inflation into account, the real return based on December's consumer inflation rate is at least 55 basis points, or 0.55%. This is due to a decrease in inflation figures and interest rates remaining relatively high. It's worth noting that fixed-income investments have not generated real returns for over a decade.
Harshvardhan Roongta, chief financial planner at Roongta Securities, stated that fixed income returns are currently exceeding inflation and that the current returns of 7-7.25% make it an attractive asset class that investors should not ignore.
As interest rates have increased, fixed-income investments have become more appealing, while equities have faced challenges after a long period of above-average performance. The Nifty index has yielded a return of 1.5% over the past year. Many experts believe that Indian stocks are overvalued in the current global scenario.
The Nifty 50 has a higher Price to Earnings (PE) ratio, a commonly used measure of valuation, at 21.7 times, compared to the 11-14 times of other emerging market peers. Meanwhile, China's Shanghai Composite is trading at a more affordable 13.37 times PE ratio.
Kunal Vora, head India equity research at Securities, maintains a cautious outlook on Indian equities. He believes that the lag effect of interest rate hikes could weigh on global growth, even though the worst of inflation seems to have passed. Furthermore, he notes that equity valuations currently appear rich, and that whenever the yield on bonds and earnings have been wide, as is the case now, market returns have usually been under pressure in the following year.
Also Read: To know about various kinds of mutual funds
How should investors invest?
Investors who are uncertain of how much they should allocate to equity and debt could consider investing in hybrid mutual funds like balanced advantage funds or equity savings funds, which determine their exposure to stocks and bonds according to market conditions.
Many balanced advantage funds, which utilize a combination of debt, equity, and arbitrage strategies based on market valuations, currently have allocated between 30% and 50% to equity in their portfolios. Similarly, equity savings funds have an allocation of 15% to 40% to equity, with the remainder of the portfolio consisting of a mix of arbitrage and debt.
For investors whose income falls in lower tax brackets, a combination of RBI bonds and corporate deposits may be a more suitable choice for investing additional funds.
Also Read: To know more about various investment options
Fixed-income investments are an attractive option for investors right now, providing a steady stream of income with less risk than other investment options. With returns exceeding inflation and equity markets highly volatile, investors should reassess their asset allocation strategy and consider investing in fixed-income products such as bank fixed deposits, corporate deposits and bonds issued by the Reserve Bank of India.
