FIXED INCOME: Make the most of interest rate hikes

At a time when real interest rates are increasing, it is good for investors to lock in fixed income products at these higher rates. While bank fixed deposits and small savings schemes are the most popular investment options for risk-averse investors, they, especially those in the highest tax bracket, should also look at debt mutual funds for higher returns.
Bank deposits

Banks are offering higher rates for special tenure fixed deposits such as SBI’s Amrit Kalash which is offering 7.1% for a tenure of 400 days. The interest rates of small finance banks are even higher than those offered by public and private sector banks and post offices. Remember, these schemes do not allow premature withdrawal facility. So, factor in your liquidity requirements before investing in special FD schemes.

Small savings

As the Budget has proposed to raise the upper investment limit for Senior Citizen Savings Scheme (SCSS) from `15 lakh to `30 lakh, those 60 years and above can lock-in at higher rates once the government notifies the higher limit. The current interest rate offered on SCSS is 8% which is higher by 50-75 basis points offered by banks to senior citizens.

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The Budget has also proposed to increase the maximum deposit limit for Monthly Income Account Scheme (MIS) from `4.5 lakh to `9 lakh for single account and from `9 lakh to `15 lakh for joint account, The five-year MIS is currently offering interest rate of 7.1%. The 5-year National Savings Certificate (NSC) is offering an interest rate of 7%. Post office time deposits (TD) are an attractive investment option, especially for up to one year as the rates are higher than public and private sector banks.

RBI Floating Rate Bonds

The RBI Floating Rate Savings Bonds 2020 are currently offering an interest rate of 7.35% paid semi-annually —January 1 and July 1. These risk-free bonds have a spread of plus 35 basis points over the prevailing NSC rate.These interest rate of the bonds is revised twice a year only if the interest rate of NSC is revised. The minimum investment amount is `1,000 and the lock-in period is seven years. There is no exit option from these bonds before maturity, except for senior citizens.

Liquid funds

You can park surplus money in liquid funds to earn returns of around 6.5%. These funds have a maturity period of up to 91 days and the funds are invested in commercial papers, certificates of deposits and other securities. As there is no lock-in period, you can withdraw money from the investment at any time.

Target maturity funds

Target maturity funds invest in government securities, bonds of public sector companies and state development loans and the default risk is lower compared to other debt funds. The bonds in the portfolio are held to maturity and all the interest payments are reinvested in the fund. The investment horizon can be from six months to over five years. These funds are less prone to price volatility as the duration keeps falling with time.Unlike fixed maturity plans, target maturity funds offer liquidity. The returns range between 6.5%-7.25%.