The Hindu Business Line : Opportunity in debt now

Failed to book profits on your equity portfolio when the markets were at 21000? Well, one lesson you can draw from the recent stock market debacle, is that investing requires you to maintain a constant vigil and grab opportunities when they arise. On that note, it is the debt market that now offers you a window of opportunity to earn attractive returns. Lock into fixed income investments, while the going is good!

The credit crisis is destroying wealth at a rapid pace, liquidity is in short supply, the banking system is short of funds and companies are scrambling to borrow even at stiff interest rates.

All this has meant a sharp upward spiral in domestic interest rates, be it in call money rates, short-term commercial paper or other forms of corporate borrowings.

Higher interest rates in the system are now being reflected in the debt options available to retail investors — be it liquid funds, fixed maturity plans rolled out by fund houses, company fixed deposits or bank term deposits.

Many banks have also opened up special deposit windows offering higher interest rates, ranging from 10-11 per cent (pre-tax) for 1-3 year terms, to tide over the liquidity crunch.

In today’s uncertain macro environment, an annual return of 11 per cent on a safe investment option appears quite attractive.

Yet, recent indications are that the high interest rates may not last very long. Concerted cuts in interest rates by global central banks, a receding inflation threat on the back of the commodity price crash and the RBI’s recent move to cut the cash reserve ratio for banks twice in rapid succession, all suggest that interest rates may peak out and begin to decline sooner than anyone expected, even a couple of months ago.

For investors, this means that interest rates of 11 per cent-plus on bank deposits and special deposit windows of banks may not last for more than a few months. Now is the time to invest in such deposits and lock into attractive interest rates, for a 2-year time frame.

This recommendation particularly applies to senior citizens, investors with a sizeable debt portfolio and those who have large idle cash balances in their savings bank. And, as a matter of abundant caution, don’t park all your debt money in one option, spread it across three or four different banks to diversify.

AARATI KRISHNAN

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