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Sunday, Dec 19, 2004

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Give debt its due

Aarati Krishnan

Without fanfare, the environment for debt investing has become more encouraging over the past few months. If a large portion of your portfolio is in stocks, this is a good time to skim off profits on a part of your holdings, and switch the money into bonds or deposits, where it would certainly be safer.

TO INVESTORS who are cheering on the Sensex as it puts on a hundred points every week, salting away any money in debt instruments would seem an almost wasteful exercise to do right now. After all, how can staid debt compare to glamorous equity, where you can watch your stock put on 10 or 20 per cent in a single day!

But quietly and without much fanfare, the environment for debt investing has become more encouraging over the past few months. If a large portion of your portfolio is in stocks, this is a good time to skim off some of the profits, and put the money into bonds or deposits, where it would certainly be safer.

To start with, the interest rates on cast-iron debt investments, such as bank deposit, are beginning to inch up, after trending steadily downward over the past three years. Most banks, both public and private sector, have pegged up the interest rates on term deposits since November.

The interest rates offered by leading banks such as the SBI are now at 6-6.5 per cent for deposits ranging from 1-5 years. Perhaps not scintillating. But it is a good 50 basis points higher than the rates that were prevailing just six months ago. Those who are willing to take their chances with a co-operative bank, and senior citizens, may get an even better deal, as they can earn a good 0.50 per cent over and above these rates on their term deposits.

The fixed deposit market may not be buzzing with activity. But if you do take care to look through the offerings, quite a few options that offer healthy returns of 8-9 per cent a year. Bata India recently advertised a one-year deposit programme that offered 9.5 per cent.

Fixed deposits in companies such as Ceat, JK Industries and JK Corp offer rates ranging from 8 to 8.5 per cent. Though these options may be several notches riskier than a deposit with Sundaram Finance or HDFC, you can contain these risks by locking into the shorter-tenure deposits of a year.

In any case, a booming economy and firm trends in commodity prices also reduce the risks associated with the debt offerings from cyclical or commodity companies. With several these businesses just out of a good year and heading for another, their finances and cash flows are in much better shape than they have been in the past. This certainly increases their debt servicing ability.

Debt funds — poor performers over the past couple of years — have also begun to get their act together. After seeing their net asset values steadily head southward for much of 2004, debt fund managers are now expecting a break in the trend. They assert that at their current levels, bond prices have factored in all the negative factors and are set to stabilise, if not ride up.

After being burnt by long-dated bonds, several these funds have also switched into bonds of much shorter tenors, placing them in a better position to take advantage of rising rates. If you are still wary of the diversified debt funds, there are still the floating rate and short-term funds, which could capitalize on the expanding demand for corporate credit.

Rates apart, the options for debt investing are also set to expand in the coming months. The mega- bond offers from ICICI Bank and IDBI, which have not made an appearance so far this year, may be flagged off sometime soon. Draft offer documents for both these offerings are with SEBI for its nod. ICICI Bank's offering may even include a couple of new options this time round. ICICI Bank's offer document shows that it has added Children's Growth Bond and a Small Taxpayers Bond to its usual bouquet of bond offerings for this year.

HDFC's new floating rate fixed deposits, which allow retail investors to earn interest rates that "float" with the market rates, are also an attractive option. They may set the tone for more floating rate deposit products in the months to come.

If debt does not seem such a bad idea anymore, do use this opportunity to re-balance your portfolio. Book profits on some of your stocks and give debt investments a chance to add to you wealth!

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