Interest rates have climbed in the last few months and have climbed really fast. Recently, Hawkins Cookers, began offering interest rates of 10.75 per cent on its three-year deposit. The yield was close to 12 per cent. Now, this is from a rock solid company, which pays whopping dividends every year.
Good quality corporate FDs like Mahindra Finance and Bajaj Finance can give yields of near 10 per cent.
The government has also hiked interest rates on small saving schemes by a whopping 0.40 per cent. Banks may follow suit, hiking interest rates on FDs, to ensure that there is no shift to the small saving schemes.
Why you should move money partially to debt?
There are a number of reasons to move money partially to debt, if you have made a decent profit. The biggest reason is valuation of Indian stocks.
Indian markets are the most expensive in the world, with the Nifty p/e at almost 28 times trailing EPS.
Recently, brokerage form Goldman Sachs gave "market weight" rating from "overweight" to the Indian markets.
It cited less favourable risk-reward due to stretched valuation to support its decision to revise weights.
The Sensex is also at peak levels, which means the risk reward ratio is definitely unfavorable. Over the last one year, since Sept 2017, the indices have given a whopping returns of near 17 per cent. Now, you may want to book profits.
Election - a big risk
One of the biggest reasons for doing so, at least partially, partially would be the political risks. A few months back, investors were almost certain that the NDA government would come back with Narendra Modi as the Prime Minister for a second term in 2019.
Nobody is certain of that, thanks to perception deficit that is creeping in, due to things like rising fuel prices. The one advantage that shares had over FDs was the Long Term Capital Gains exemption. Even that is gone, following Union Budget of 2018-19.
Hike in interest rates
It is almost certain that the Reserve Bank of India will raise interest rates in its policy meeting of October, which will once again push interest rates higher.
For long, investors have been pumping money into stocks, as interest rates were low, gold was giving negative returns and real estate was going nowhere.
Now, with interest rates rising sharply, we are likely to see an increasing interest in debt instruments all aver again.
For the Sensex to yield 10 per cent (equivalent to FDs) returns from here, it has to be at near 41,000 levels by Sept next year.
This looks difficult at the moment, due to a whole lot of uncertainty, especially the election uncertainty.
Clearly, it is time to move money partially to debt from equities. Making money in stocks is all about get your timing right.
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