Amid Covid 19 led uncertainty when Indian markets are witnessing bouts of volatility and there is expected to be further correction, those taking the fixed income route of investments are also suffering the loss in purchasing power of their money as the inflation continued to be high.
Now to generate enough returns that can be meaningful for you. Here are some safe bets for you:
1. Government bonds:
In its February MPC, the government said it would allow retail investors to directly invest in government bonds by opening gilt accounts with it. In the current regime, the return on 10-year benchmark bond is 6.03 percent. And so in case you hold these bonds for the entire 10-years, you will get 6.03 percent per annum.
This yield is based on the government's borrowing programme as well as RBI's monetary policy outlook.
Why these bonds are safe?
Such instruments are safe being backed by the government of India. These are like a loan you make to the Indian government. Here you subscribe to the bond and the government guarantees you payment of coupon rate or interest rate.
2. 7.15% Government of India (Taxable) Savings Bonds:
These bonds were first available for sale from July 1, 2020 and offer floating rate interest tied to the NSC. Currently the rate is 7.15% and it is revised every six months based on the NSC rate. For these bonds, there is no cumulative interest pay out option. For buying these bonds one can visit designated branches of banks including SBI, HDFC Bank, ICICI Bank, Axis Bank and others.
3. AAA rated Corporate bond funds:
These corporate bond funds as per SEBI guidelines need to invest at least 80% of the corpus in AA- and above rated corporate bonds. Now some of the benefits of making the allocation in these funds is less credit risk owing to investment in AAA rated corporate. Also, these corporate bond funds offer a higher rate of return in comparison to bond funds.
Here another advantage over the traditional fixed income instrument such as FDs is that they offer a higher return as well as are more tax efficient for those in the higher tax bracket. with investment horizons exceeding 3 years.
|Fund||1-year return||3-year return||5-year return||10-year return|
|L&T Triple Ace Bond Fund||8.25%||9.59%||8.7%||8.04%|
|Axis Corporate Debt Fund||9.1%||8.09%|
|HDFC Corporate Bond Fund||9.07%||9.04%||8.81%||9%|
|ICICI Prudential Corporate Bond Fund||8.64%||8.62%||8.35%||8.54%|
|ABSL Corporate Bond Fund||9.54%||9.07%||8.7%||9.2%|
Source: Value Research
Why they're safe:
The AAA rating is the highest rating a company and its debt can be accorded. Companies rated AAA by credit rating agencies have been judged to have an extremely high capacity to meet their financial obligations - so it's unlikely they'll default on the bond's interest payments or fail to repay the principal. AAA-rated corporate bonds are considered only slightly riskier than government bonds.
4. Blue-chip stocks:
Though equities tend to be volatile, bluechip stocks or basically large cap companies are deemed as carrying the lowest risk among equities. And equity investment is necessary to beat inflation in the long run and to accumulate wealth over time. Some of the blue chip stocks recommended for investment in India have been RIL, Infosys, HDFC, Bharti Airtel among others.
Why these are considered relatively safe?
These stocks have a long history of existence as well as success and are mostly leaders in their respective sectors. Though there is no certainty with these blue chip stocks but these at worst may stagnate rather than decline in value. Furthermore, these blue chips are consistent in paying dividends and in fact both the value as well as dividend for these stocks tend to go gently higher.
Exchange traded funds are mutual funds that are traded on exchanges. One can go for bond or equity as the underlying in the ETF. And for the low risk ETF, one can go for ETFs that track an index of a precisely low-risk asset such as AAA rated corporate bonds, treasury etc.
Also, these ETFs are economical on one's pocket and provide an exposure to a basket of securities.
Now if you are convinced with these safe set of investments suggested than one must also be knowing the associated risk of safe investments:
1. Inflation risk:
Here the inflation risk is a threat as the rising prices will eat into the principal as well as returns of your investment. Now, for the long term, one needs to invest in investments that generate return over and above inflation such that the value is not lost.
2. Liquidity issue:
There can be liquidity issues arising in case of some of the low-risk investments say for instance in case of CDs on early redemption there is charged a fee.
3. Low return:
This is definitely an attribute of a safe investment and hence one is advised to take calibrated risk to earn slightly higher returns.