The interest rates in India and globally are presently the lowest on record. This trend has played out over the past few years and the trend line is downwards. The short term interest rates are as low as 3.5%-4% pa on FDs of major PSU and Private banks.   The benchmark 10-year G. Sec yield is around 6% which is again a record low in the Indian context. This is in sync with the global trend where leading countries like Japan, Germany, USA, Canada, etc. quoting negative interest rates (which implies you have to pay a bank for parking funds with them!)

While this augurs well for individual Borrowers (home loan, Car loan, personal loans, etc.) and corporate borrowers, it poses a BIG Challenge for investors who rely solely on Interest incomes for meeting their routine expenses. Most of the Senior citizens, Retirees or investors relying majorly on interest incomes fall under this category who get impacted the most.

So what are the options for such investors in this period of low interest rate regime.

So while it makes sense to first opt for SCSS and PPF there are various restrictions on eligibility, maximum amount and withdrawals which makes it necessary to have alternative schemes where one can invest. Ideally one should use the benefits of SCSS/PPF but it cannot replace the need  for flexible investments that offer better returns that short term fixed deposits.

Corporate FDs and Bonds and NCDs of companies with strong parentage like L&T, Bajaj Finance, Tata Capital, M&M Finance, etc. are good examples. Also there are NCD/Bond issuances from well rated and financially sound NBFCs like Shriram Transport Finance, Muthoot Finance as well as from Government PSUs like NTPC, SBI, PFC, REC, IIFCL, IREDA, etc. the Bonds issued by PFC, REC, IREDA are pre-dominantly Tax Free in nature and therefore with lower yield and the suitability depends on the income profile of the individual. These offer relatively better returns than FDs and flexible options on interest payment like monthly, half yearly, annual and cumulative (Zero Coupon). The yields on the above bonds (non tax free) is generally 100-300 bps above Bank FD rates. The risk profile on these is slightly higher and security wise inferior to Bank FDs; however, all are AAA/AA rated entities with fairly sound Credit Quality. Finding the right NCD suitable to individual need and Liquidity are some of the major challenges in investing in these instruments, but the Higher yields make the efforts quite worthwhile.

Also its better to stick to quality issuers instead of just chasing yields.  While investing in Bonds / NCDs one must remember that there are issuances from relatively riskier issuers with risks emanating from lower credit rating or riskier business models or weaker corporate governance. The Yields on these bonds/NCD can be as high as 500-800 bps or even higher above similar tenor FDs. BUT one must keep in mind that issuances from DHFL and Reliance Capital had to be written down and are therefore investing in High Yield bonds can be quite risky and therefore should be STRICTLY an AVOID.    

To sum up, there is a wide range of listed NCDs and Bonds which are exchange traded and can be bought by individuals in both primary and secondary markets based on their suitability. Individual income and risk profiles and requirements need to be studied before making the right choice.  

Get in touch with us to know which investment options work best for you!