Obligation path offering higher income

One and half years tightened the monetary policy gradually by RBI interest rates have gone up sharply over last year. The increasing interest rates have changed savings landscape for investors. The prospective of debt instruments has increased over the last few months due to their increasing profits as interest rate increase up. Other side euity market are going indecisively due to the global instability.

These are some obligation-based instruments in the market:

A Saving scheme contain various provident fund, bank fixed deposits, public provident funds, National Savings Certificate etc. Saving scheme is a risk free with respect to the principle amount and also assures to bring good returns in terms of interest. RBI has deregulated interest rates on savings bank accounts. This means interest rates will increase up on savings bank deposits as well as short term deposit.
Tax-saving instruments are options investors can consider in their investment planning. It is close to the end of the third quarter of the current financial year, and investors should start investing in tax-saving instruments. Many longterm debt funds offer tax benefits under various sections of the Income Tax Act. The returns net of tax are quite attractive in most of these schemes as they offer tax benefits.

Debt-based mutual funds invest in safer avenues such as government bonds, securities , corporate fixed deposits and debentures. Since the interest rates have gone up, debt-based mutual funds are expected to offer better returns too. There are various options available in the debt mutual funds market and investors can select them based on their investment horizon and riskreturns balance. Investors with a short horizon can invest in liquid funds which offer good returns and are highly liquid . On the other hand, investors looking for higher returns can go for pure debt funds or balanced funds.

There are many innovative and structured products that are linked to the equity markets using the F&O strategy . Theoretically, these products are designed to protect the principal amount and the returns are linked to the market movements. Therefore, these products promise a better balance with respect to risk and returns. However, these products are quite new and are often sold on mathematical calculations and derivations. Many of these products have high management charges and fees. Therefore, investors should go through the various fund management charges as well as their terms and conditions carefully before committing large amounts towards these instruments.

The potential of debtbased instruments has gone up due to the interest rate hardening. On the other hand, uncertainty in the global markets, weaker outlook for the corporate sector and stretched valuations in equity have shifted the riskreturns balance more towards risk for equitybased instruments. Therefore, small investors should review their portfolios and the various factors influencing their investment requirements (objective, horizon, risk appetite etc) and make the required changes in their portfolios to ensure balance between risk and returns.

Source: Admission Corner