There are two things that are right now happening that can alter your investment strategy a little. The first is that equity markets are near peak levels and the second is that interest rates are rising in India and the global markets.
When this happens, it is only sensible to move money from equity, where you would have made money over the last few years, to debt, as interest rates are rising.
Why move money from debt to equity?
When markets are at peak levels, your risk to reward ratio turns unfavourable. At the moment, there are far too many risks for the domestic and global markets, which should keep investors on the edge. The biggest risk for the stock markets come from a falling rupee, rising crude prices, and trade tariffs.
What's most important is that interest rates are rising, not only in India, but also across the globe. In due course, it is possible that they rise even further, making debt instruments a lucrative proposition all over again. In India, the Reserve Bank of India, may once again hike interest rates, which will further pave the way for higher interest rates.
Interest rate nears 9 per cent
Today, corporate FDs come with interest rates that are near 10 per cent. Mahindra Finance offers an interest rate of near 8.75 per cent, with yields that are near 9.75 per cent. Bajaj finance on the other hand offers an interest rate of 8.50 per cent.
Non Convertible Debentures are being offered at interest rates of as high as 9.25 per cent. Increasingly, debt instruments are now becoming attractive, and there could be a gradual shift as the real rate of return rises.
As far as taxation is concerned, there is no great advantage now, given that equities also attract a long term capital gains tax like shares.
At the moment the markets are clearly discounting an NDA government in 2019. However, while that would have been a certainty a few months ago, it is not anymore. While one cannot predict the election outcome, rising petrol and diesel prices to a new record, is not going to do any good.
At the moment the election outcome looks extremely difficult to predict, given the way alliances have shaped up in the last one year. A better proposition would hence be to move money partially to debt in case you have made money in equities in the last few years.
Getting decent yields of near 10 per cent over a 5-year tenure is not too difficult these days.
The Nifty trailing p/e is at almost 27 times, which really means at least the Nifty component are trading high price to earnings multiple. Unless earnings grow at 20 per cent in the next two years, the markets are clearly overvalued.
It's time to at least sell selectively and move money into debt. It is almost certain that interest rates would rise even further.