Reliance Capital Asset Management Head (Fixed Income) Amit Tripathi
Investing in a fixed income instrument is driven by a few major factors-age and risk profiles, investment term based on goals, the need for regular income, taxation and liquidity.
Broadly, there are a few fixed income investment avenues
an investor can choose from:Tax-free bonds:
It is best suited for investors in the highest tax bracket looking for a long-term tax-efficient investment linked to the market. Taxfree bonds offer limited interim liquidity, but allow investors to stay with higher interest rates. However, unless the investment term is not timed with the bond's maturity period, it can expose the investor to mark-to-market risk. These can be a core longterm debt holding.Taxable Corporate Bonds:
Like corporate fixed deposits, investors are now looking at public issuance by private sector companies favourably. The advantages are secondary market liquidity and market-linked rates. Evaluate credit risk thoroughly and do not get carried away by the higher coupon rates.Mutual Funds:
Given the institutional nature of the fixed-income market, mutual funds offer investors exposure to market-linked rates, in terms of returns and tax efficiency. Investors have plenty of options in debt funds, such as liquid funds, dynamic bond funds, short-term funds, monthly income plans and fixed maturity plans (FMPs).WHY DEBT FUNDS?
Volatility has increased significantly in the past six months due to the macro environment. The current high rates also provide attractive investment opportunities. Considering this scenario, an investor can look at investing in these funds:Short-term funds (including creditfocussed moderate-duration funds):
These offer an intermediate (one to two years) investment solution. As short-term yields are high now, it has the potential for moderate capital gains over a 12-month period.Dynamic bond funds:
Active management allows these funds to take advantage of current high yields and market volatility. Investors with reasonable risk appetite and an investment horizon of 18-36 months can gain from entering now. These should form part of an investor's long-term debt investment.Monthly Income Plan:
It has a marginal equity allocation and is possibly the best alternative to long-term postal savings and fixed deposits. Investors with an investment horizon of three to five years and over can look to buy. It is a good option given favourable expectation in equity and fixed-income markets.Tax-free bonds:
Again, given the market expectation, tax-free bonds are available at about 0.5-1% higher than a year back. This means investors have the opportunity to stay with a higher interest rate. Consider these as a long-term investment.AMIT TRIPATHI
Head, Fixed Income, Reliance Capital Asset Management