While equities went through a lot of volatility in 2020, debt products gave stable returns due to falling interest rates. Those who had invested in debt securities, directly or through MFs, reaped the benefit of higher yield. What about 2021?
Debt product returns are driven by interest rate movements. Falling interest rates increase yields and vice versa. Given the economic slump, the primary focus of the central bank will be on reviving growth and, hence, chances of any significant rise in interest rates are remote. This means the difference between returns from fixed rate products such as bank fixed deposits (FDs) and yields on debt securities will not be as huge as last year.
So, how should you decide whether to invest in a debt fund or a fixed-rate instrument such as bank FD or small savings schemes? Experts say unless there is a significant change in interest rates, returns (yields) given by debt funds and fixed rate products will be similar. So, people who do not mind the long lock-in period of fixed rate products such as bank FDs can go for them. On the other hand, people who like higher liquidity may prefer open-ended debt funds.
One segment with high dependence of debt products is senior citizens. "Conservative investors may invest in bank FDs and choose a monthly or quarterly interest payout option to earn regular income. One may also choose the Post Office Monthly Income Scheme to get interest on a monthly basis. If you are a senior citizen, you may consider Senior Citizen Savings Scheme (SCSS) for quarterly interest payments," says Archit Gupta, Founder and CEO, ClearTax.
SCSS returns are the highest at 7.4 per cent while Post Office MIS is giving 6.6 per cent. When it comes to bank FDs, large banks are paying just 6 per cent or so. Another good option for regular income after retirement is Pradhan Mantri Vaya Vandana Yojana (PMVVY) which is giving 7.4 per cent. The investment cap in both SCSS and PMVVY is Rs 15 lakh. If you have surplus funds or are not eligible for SCSS and PMVVY due to the age factor, one option is to buy the RBI Floating Rate Bond that is paying 7.15 per cent. It pays interest semi-annually; the rate is 0.35 per cent above what is being offered on the National Savings Certificate. If you wish to generate a higher return and are willing to take some risk, try mutual funds. "Invest in Monthly Income Plans. These debt funds mainly invest in fixed-income securities and intend to provide regular dividends," says Gupta of ClearTax.
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