Align your fixed income strategy with your risk profile & financial goals
There has been much discussion on whether it makes sense to allocate more to fixed-income investments in India, given that returns on such investments are marginally above the inflation rate. There are several factors to consider when making this decision, including the outlook for interest rates, the performance of fixed-income investments in recent years, and the impact of recent tax changes on debt mutual funds.
Also Read– These Two LIC Schemes Ending Today For Investments: Check Calculator, Benefits
Bank FD rates
Since May last year, the Reserve Bank of India has been increasing interest rates. Bank FD rates are now in the 5.50%-7% range, depending on the bank and whether it’s a PSU bank or private or neo bank/NBFC. This has made bank FDs attractive for investors looking to get stable returns. Senior citizens can also look at an increased interest rate of 8% in SCSS, where the limit also has been increased to Rs 30 lakh.
Similarly, as rates increase, the yield of long-term bonds becomes attractive, with the yield on 10-year bonds at 7.31% in February 2023, up from 6.43% in February 2022. This can be a good opportunity to invest in long-term bonds, including gilt funds, which have an average return of 7.5% to 8.00%.
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Scrapping of LTCG tax benefits on debt funds
Apart from FDs and bonds, another debt investment option is debt mutual funds. On average, debt fund returns are 6%-8% and are popular among investors, especially HNIs and UHNIs. Till this financial year, any debt funds beyond a three-year period were taxed at 20% LTCG after indexation benefits. For debt funds held for less than three years, tax implication was as per tax slab.
However, as announced in the Finance Bill 2023, from FY 24, there will be no LTCG or indexation benefits on debt funds. While this amendment will be a blessing in disguise for FDs and bonds with increased investor participation to leverage tax-saving, debt funds are likely to take a significant hit.
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What should investors do?
The answer to whether investors should allocate more funds to debt instruments in the new financial year depends on their individual requirements. While inflation-beating returns are attractive, one should approach fixed-income investments by analysing one’s short- and long-term financial goals and risk profile.
Instead of skewing more towards debt instruments with slightly higher real return potentials, constructing a diversified portfolio consisting of both equity and debt is crucial to balance out the risks and returns. Also, investors should undertake portfolio creation and alteration with a 360-degree perspective, considering current micro and macroeconomic conditions in the nation and globally, and after consultations with an expert.
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The writer is director, Scripbox
FIXED INCOME
-With interest rates rising, it can be a good opportunity to invest in long-term bonds
-Senior citizens can now invest up to
– Rs 30 lakh in Senior Citizens Savings Scheme offering 8% interest
