If you are want to raise your debt market investment because you do not know where the stock market is going to go, or you don’t have enough information to make a calculated investment decisions, stay out of equity markets. And yes, of course, look at the debt market.
Yields on debt instruments have surged, thanks in part to the liquidity crisis, which makes some debt instruments more attractive. In debt funds, short-term debt funds are the only places where you need to train your investing guns.
Remember, the debt market is volatile too because the debt market is reeling from a credit crunch post the IL&FS crisis. Debt instruments are getting slammed and prices of debt instruments are down where the market anticipates a looming default. Hence, invest carefully in debt instruments too.
Of course, refraining from entering into the equity market that is plummeting is much better than taking a high risk. You know the age old adage: money saved is money in the bank.
In the stock markets, things are going from bad to worse. The bellwether index has been on a downward spiral. The stock market peaked on August 28 at 11738 points on the Nifty. But since the stock markets have lost 12.71 percent. But don’t look at the index. You will only get half the picture. Most stocks out of the index have crashed to multi-year lows after a good run.
BUT WHERE?
In India, debt yields have firmed up. Over the past year, the 10-year benchmark government security has increased from sub-seven percent levels to 7.93 percent. This is an increase of about 100 basis points in the past one year. The rise may seem small in absolute terms, but in percentage terms the rise amounts to 13.2 percent from 7 to 7.93 percent.
The Reserve Bank of India raised repo rates by 25 basis points making debt more attractive for investors. You could look at some of the options that are available in the debt market for retail investors where yields on many NCDs and bonds have inched up to 9 percent plus.
Some fixed income papers are yielding much higher rates of 10 percent plus, but avoid them for now because some of these yields have shot up for a reason. Bonds of non-banking finance companies are on the rise because of a liquidity crunch in these companies. So look for bonds of good manufacturing companies where the yields are lower, but your investments can remain relatively less volatile.
DON’T GO BEYOND SHORT-TERM
In the debt market, if you want to invest in mutual funds, don’t look beyond short-term debt funds. These type of funds are a play at the short-end of the yield curve, hence any ups and downs in the debt markets interest rate movements will have little impact on these funds. By contrast, a rise in domestic interest rates can hit long term debt funds really hard with their net asset values taking it in the chin.
Global markets are not out of the woods yet. Crude prices are still firm at $73 per barrel, which hits the domestic current accounts. In turn, this will keep the pressure on the rupee.
If the rupee comes under more pressure, the RBI will have to raise rates in the debt market to control domestic inflation. This will mean further pressure on medium and long-term debt funds. So it’s better to stay at the short end of the yield curve.
