Reap big gains from fixed income plans

The spate of rate hikes by the RBI may have left a deep hole in the pockets of borrowers but for investors in fixed income products this is perhaps the best time to get maximum returns from these instruments.

Investors should lock their money in debt mutual fund (MF) products such as fixed maturity plans (FMPs) now by cashing in on the high interest rates as the window for further hike and consequent gains is quite limited, industry officials and experts said.

With the markets already having priced in the current rate hike and the monetary tightening expected to pause soon, fixed income investors would do well to make the most of the current situation, they said.

"The (current interest) rates are extremely attractive. Instead of waiting for further hikes, investors can commit funds at these levels," said Abhinav Angirish, founder, investonline .in, an investment advisory. "We are nearing the end of the tightening interest rate cycle.
So a lock-in kind of (investment) strategy would work well," said Lakshmi Iyer, head, fixed income and products, Kotak Mahindra MF. "There would be no substantial hike in rates in the coming months," a senior industry official said. However, investors should also have exposure to short-term debt MFs to benefit from any upside in interest rates, Lakshmi said.

"Investors can have 20-30% in short-term funds, which can be used to complement FMPs." The continuous policy intervention from the central bank has pushed up bank certificate of deposit (CD) rates. While one year CD rate, the rate at which banks borrow from the market, is hovering close to 10%, even three-month bank CDs are ruling at 9.3%-9 .5%, industry officials said.

With this, FMPs that have duration of little over a year would be able to offer post-tax returns of nearly 9% beating most other categories including bank fixed deposits, they said. However, FMPs can be redeemed only on maturity and would not suit those who require money at short notice. Though there is no liquidity in FMPs, there are no mark-to-market (MTM) risks with them, industry officials said