How to invest Rs 10 lakh in debt investment options for 5-7 years Here are some options that an individual can look for investment and earn higher returns. It is important for an investor to understand to know his/her risk profile before making debt investments
The kind of interest rate volatility we have seen in the last 4-5 years has made debt investors a little nervous about the likelihood of such a situation returning. Given this worry, how should a person who has Rs 10 lakh to invest now put the money into various debt investment options for 5-7 years to earn higher returns? Let us explore the best options.It is important to understand that the interest rate environment plays a big role in debt investment. The movement of interest rates of bank fixed deposits (FDs) is a good indicator of the interest rate direction debt products will take. Banks have significantly increased interest rates on fixed deposits since May 2022. This happened after the Reserve Bank of India (RBI) hiked the repo rate and other key policy rates, to tame inflation. Once inflation is within the RBI's expectations, it is likely that the central bank will start cutting the repo rate. One can gauze the short-term interest rate movement, however, it is difficult to predict the movement of long-term interest rates. So, any investment strategy needs to factor this in.
Depending on the risk profile, an investor investing into a debt product can be broadly divided into three categories: conservative, moderate and aggressive. An investor can invest in different debt investment options with varying degree of risk depending on his/her risk profile.
What debt investments should you consider
ET Wealth spoke to financial experts on how various categories of investors can invest in debt investment options. Here is what they said:
Conservative investors
Vishal Goenka, Co-founder of IndiaBonds.com: For investors who prefer a conservative approach, government securities stand out as the most favourable choice. These securities are supported by sovereign guarantee and offer significant returns.
Jay Thacker, RIA Member, Association of Registered Investment Advisors (ARIA): Conservative investors can use conventional debt investments to build their debt investment portfolio and earn higher returns for 5-7 years. A conservative investor can use EPF investments till Rs 2.5 lakh, which offers tax-free interest in a year. Apart from EPF, if the PPF account is due to mature or is in the extension period, then it should be continued along with the contribution to the PPF account. NPS investors who are due to reach 60 years of age in 5-7 years can use NPS debt portfolio of government securities and corporate debt to earn decent returns. Government securities like fixed coupons with tenure of 5-7 years can offer non-volatile benefits provided they are held till maturity. To further diversify the debt portfolio, money can be invested in sovereign gold bonds. The maturity amount is tax-free, but the interest earned during the 8-year tenure is taxable. For monthly income requirements, Post Office Monthly Income Scheme (POMIS) can be looked at. From a liquidity perspective, debt mutual funds and bank fixed deposits can be looked at. They offer short-term interest rate benefits in a high interest rate environment.
Rahul Jain, President & Head, Nuvama Wealth: Conservative investors with the lowest risk-taking ability must have the maximum allocation in safe instruments, settling for lower yields. He/she should invest Rs 10 lakh in the following manner: 35% in AAA rated NCD/bonds/corporate FDs; 30% in bank FDs, RBI bonds and small savings schemes; 25% in AA rated NCD bonds and 10% in short-term debt funds. NCDs, bonds and corporate FDs are chosen as they offer higher yield along with a certain level of safety. On the other hand, bank FDs, RBI bonds and small savings schemes offer higher safety compared with others but with lower yield. A part of the money should be allocated to short-term funds for liquidity purposes.
Moderate investors
Vishal Goenka, Co-founder of IndiaBonds.com: For those categorised as moderate-risk investors, investing in AA+ and AAA rated corporate bonds from reputable PSUs like NHAI, PFC and REC can be a prudent decision. Additionally, corporate bonds from entities that have a high credit rating can give appealing interest rates.
Jay Thacker, RIA Member, ARIA: Apart from the options mentioned for conservative investors above, a moderate investor can also look to invest in RBI floating rate bonds, Government of India inflation indexed bonds and state development bonds to earn higher returns with some volatility. Among debt mutual funds, short and medium duration funds with average maturity that matches the funds requirement should be a good option. Target maturity funds are also another good option.
Rahul Jain, President & Head, Nuvama Wealth: Moderate risk-taking investors can allocate equal portions in safe (AAA-rated) and high-yielding (A & AA) securities. The Rs 10 lakh investment amount can be allocated in the following manner: 35% in AAA rated NCD/bonds/corporate FDs; 25% in AA rated NCD bonds; 20% in bank FDs, RBI Bonds, small savings scheme and 10% each in short-term debt funds and A rated NCDs and bonds. It is important to note that A rated NCDs and bonds offer higher yield than other debt investment options but nothing in terms of safety.
Aggressive investors
Vishal Goenka, Co-founder of IndiaBonds.com: High-yield bonds are a viable option. It's worth noting that bonds offered by small finance banks and micro-finance banks are particularly well-suited for this group of investors. However, even investors with a high risk appetite should restrict themselves to entities with A credit rating; BBB ratings are really suitable for sophisticated institutional investors and not individuals.
Jay Thacker, RIA Member, ARIA: In addition to the debt options mentioned for conservative and moderate investors, Dynamic bond funds should be added to the portfolio. This will give the portfolio multi-tenure exposure, leading to higher returns due to active fund management. But it comes with higher volatility as well. While making investment, it is important for aggressive investors to allocate more money towards debt investment options offering higher yields with a certain amount of safety. For instance, GOI inflation indexed bonds and state development bonds can be a significant part of the portfolio. However, fixed coupon bonds, which are relatively safer, can form a small part of the debt portfolio.
Rahul Jain, President & Head, Nuvama Wealth: Aggressive risk-taking investors can allocate more to A & AA rated securities, which can give much higher yields than AAA and sovereign bonds. The allocation of Rs 10 lakh can be done in the following manner: 35% in AA rated NCD/bonds; 30% in AAA rated NCDs, bonds, corporate FDs; 25% in A rated NCD bonds and 5% each in banks FDs, RBI bonds, small savings schemes and short-term debt funds.
How to build a debt investment portfolio
It is important for individuals to be clear about their investment objective. Goenka of IndiaBonds.com says, "Two crucial considerations that retail investors should bear in mind when it comes to investing are: invest to fulfil financial goals; second, determine which financial instruments will best help them achieve these objectives. When it comes to debt investments, especially in the context of the current peak interest rate cycle, it is an opportune moment to allocate resources into various debt securities to lock-in at favourable yields."
The next aspect you will need to work out is the strategy. "When delving into fixed-income securities, a prudent approach involves aiming for a net return of inflation plus 2-3%. It's also essential not to overlook liquidity as a critical aspect when designing a debt portfolio. Another strategy to consider is the ladder-up approach, wherein an investor diversifies across bonds with varying maturity dates," adds Goenka.
Also Read: Use this formula to get maximum of rising FD interest
Also Read: How laddering can help you get best returns from fixed deposits
Things to keep in mind before making investments
All investors should take into consideration certain factors before investing in a debt investment. Jay of ARIA says this is required irrespective of the risk category. These are:
a) Debt investments should be chosen in a way to avoid frequent churning of the portfolio. Go for a suitable mix of average maturity and in-turn portfolio maturity to meet your financial goals.
b) Debt investments should never be done only to earn significantly higher returns. Beyond a point, only the risk of the underlying security will increase, without generating any additional returns over the investment period. This defeats the basic purpose of debt investing.
c) The combination of investments within the debt portion of the portfolio should be such that the duration, coupon rates, security and liquidity are balanced according to the investor's requirements.
d) In a portfolio consisting of a mix of equity and debt, the debt portion should not assume significant risk, even for aggressive profile investors, as that can lead to losses, including chances of a default.
Therefore, it is important for investors to first understand their risk profile and the risk associated with each of the debt options before deciding which ones are suitable.
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This story originally appeared on: India Times - Author:Faqs of Insurances
