In the past eight months, the Reserve Bank of India (RBI) has already slashed interest rates thrice and market participants believe there could be another rate cut in the near future. Given the fall in interest rates, this may not be the right time for investors to invest in instruments such as fixed deposits as these will not fetch adequate returns
to beat inflation. Financial experts advise that now is the time when you should relook at your portfolio and choose instruments that will yield better returns.
Company fixed deposits:
At this juncture, when interest rates on bank FDs are falling, investors could look at investing in high rated company fixed deposits, for a time horizon of one-three years. A company FD will yield you higher returns, at least 100-150 bps more than what a bank FD would offer. However, financial experts suggest that before you decide to invest in a company FD, make sure you check the background of the company, credit rating of the FD and its past performance and then go ahead.
Short-term debt funds:
When interest rates are falling, financial experts suggest investing in instruments like short-term bonds and debt funds would be a viable option, for a time horizon of one-two years. Short-term debt schemes invest in debt instruments and aim to provide higher returns than bank FDs when interest rates are low. Debt mutual funds gain momentum when interest rates fall. This is because when interest rates fall, bond yields fall and prices rise. Short term funds usually carry low risk.
Non-Convertible Debentures (NCD):
NCDs are floated by companies that offer a higher interest rate than traditional instruments such as bank fixed deposits or public provident funds. They are mostly secured against the assets of the issuing company, and hence the risk of default is low. Debentures issued by large companies with strong financials carry lower risk as against smaller companies who offer higher interest rate. Companies issuing NCDs carry a rating from agencies such as CRISIL, ICRA or CARE. Those NCDs carrying higher ratings can be lookedat.
Investing in the stock market, especially in good quality stocks, for the long term could be another option, note experts, when interest rates are falling. However, if you are a first time investor and are not too sure on which stocks to buy, it is better to take advise of a stock market expert. Choose the mutual fund route and avoid penny stocks.