By Vibhor Mittal
The world we live in today is ever-changing and, sometimes, not for the best. The Covid pandemic adversely affected economies worldwide, and now the war between Russia and Ukraine. Against an already turbulent backdrop of global inflationary pressures, the war took a further toll on global economies. In India, there are talks of stagflation – a phenomenon marked by slow economic growth and relatively high unemployment—or economic stagnation—which is at the same time accompanied by rising prices.
Alarmed by the disruptions, shortages and escalating prices induced by geopolitical tensions and sanctions, the RBI raised the repo rate by 50 basis points (bps) to 4.9% – the second such hike in a month after previously raising interest rates by 40 basis points (bps). India’s GDP forecast remained unchanged at 7.2%. Inflation has continued to stay sticky and outside the RBI’s comfort zone. Given the grim financial scenario facing us, it becomes crucial to think about preserving wealth and choosing an alternative, stable options to invest in beyond equity.
In the case of HNIs, UHNIs, family offices and other young, wealthy individuals who have considerable capital to invest and protect, it’s important they figure out the best strategies to meet their financial goals. While none of us can say what the future will bring or how the markets will turn, it is always a good choice to have a diversified portfolio allocation across multiple asset classes, including fixed income instruments depending on the risk appetite and investment horizon.
Fixed Income Investments
In the past two years, the equities market has been on an upward trend. However, driven by adverse macroeconomic factors and persistent outflows from foreign investors, the market has corrected significantly from peak levels. The volatility is expected to remain high in the near term. Most retail investors, including HNI and UHNI, have seen significant capital erosion in their portfolios. At such times, Fixed Income Assets that offer the dual benefit of capital protection and stable returns may be ideal. While the returns may be capped, they are a safe and secure investment option.
- Corporate Bonds: These instruments offer the benefit of capital protection along with the promise of stable cash flows and assured return. Investors should invest in better-rated listed bonds that have high liquidity. Bond yields have increased significantly in the past few months, making this investment option more lucrative for investors.
- Market-linked debentures (MLD): Listed MLDs can offer better post-tax returns owing to reduced tax incidence compared to other debt instruments, making them an excellent choice for HNI portfolios. The effective tax rate on MLDs (including surcharge and cess) could be less than 12%, compared to around 43% in corporate bonds for individual investors in the highest income bracket.
- Commercial Paper (CP): For HNIs and young wealthy individuals looking for a short-term investment, CP could be considered. An unsecured and short-term investment, they are widely issued by corporates and financial institutions to raise debt for a short period – usually between 30 to 180 days with interest rates ranging from 4% to 10%.
- Asset-Backed Securities (ABS): These instruments are backed by collaterals that generate regular monthly income and cashflows. The structural features and credit enhancement usually available in ABS transactions provide an additional layer of safety of capital and returns to the investor.
HNI investors are more worried than ever about preserving their money and maximising the returns on their portfolios. While investment options change, the essential premise remains the same: for an appropriate portfolio allocation, diversification across asset classes is recommended to reduce volatility while keeping investment objectives and cash flow requirements in mind.
(Vibhor Mittal is the Chief Business Officer – Fixed Income (YubiInvest), Yubi (formerly CredAvenue). The views expressed are the author’s own. Please consult your financial advisor before investing.)