The coronavirus outbreak and subsequent movement restrictions have added pressure to an already ailing Indian economy. As economists project a contraction in the GDP (gross domestic product) for the current financial year, the Reserve Bank of India (RBI) will continue to keep repo rates lower, until economic growth gathers pace.
Repo rate is the rate at which the RBI lends money to commercial banks, in case they have a shortfall of funds. This rate is decided by the Monetary Planning Committee, headed by RBI's governor, based on the economic condition of India. When the economy is weaker, people are encouraged to spend using cheaper loans so as to push economic activity.
On the other hand, if the economy is doing well and inflation is rising from higher demand for products, the repo rate is increased so as to limit cash flow in the economy, encourage more people to save and control inflation.
As a result, interest rates on fixed deposits or even savings bank accounts are likely to remain low in the months to come.
Furthermore, uncertainty at the end of the pandemic is also keeping markets volatile.
How will lower interest rates affect investments?
A decline in interest rates will affect savings as well as investments. Some savers, for example senior citizens, depend on fixed deposit interest rates for their income in their retirement years. Even those looking to beat inflation will face challenges due to falling returns on deposits.
With the risk involved in equity investments and low-interest rates on FD, investors have been looking at an alternative to make higher returns.
1. Fixed Maturity Plans
These are close-ended and time-bound mutual fund schemes. Your money will be invested in fixed income papers and bonds in such a way that their maturity aligns with the tenure of the scheme. The plan's tenure will vary from a few months to a few years, depending on the scheme.
Just like a fixed deposit, FMPs are usually locked at prevailing interest rates, thus guarding investors against a fall in rates in the future.
2. Ultra short term funds
There are mutual funds with short and medium-term tenure that can be held for 6 months to 2 years. These are ideal for those looking to maintain liquidity while earning a slightly higher interest rate.
3. Government bonds
While generally returns on government securities is lower than bank deposits, the yield (annualized return or interest) on them is at par with fixed deposits right now. You can invest in them through mutual funds, ETFs, or directly.
You could also look at investing in Bharat Bond ETFs, which are managed by Edelweiss Asset Management Company on the government's behalf. Bharat Bond ETFs invest exclusively in AAA-rated papers of public sector companies like Power Finance Corp, REC Ltd, etc.
4. Debt mutual funds
These are more secure than equity investments as the funds are invested in highly rated fixed income securities like corporate bonds, government securities and money market instruments. However, these funds can be vulnerable to depreciation and appreciation.
They are highly liquid and offer better returns when compared to a bank FD.
5. Corporate FD
If you are willing to take a risk on a business, Financial and Non-Banking financial companies (NBFCs) offer deposits with higher interest rates when compared to a commercial bank. The maturity of these deposits can range from a few months to a few years.
However, the financial viability of the company offering such an FD is important. When you pick a company FD, it would be wise to check the credit rating of the FD, company background and payment history (whether or not it has previously defaulted on interest or principal payment).
6. Sovereign Gold Bonds (SGBs)
Gold has been the best performing asset this year, thanks to uncertainty brought by COVID-19. Uncertain economic or geopolitical environment causes investors to flock to safe-haven assets, like the yellow metal.
The Sovereign Gold Bond (SGB) Scheme is government security that measured in the units of gold. It is a convenient way to own gold on paper.
It means that when you own a certain weight of gold through this scheme, you will be owning the same value in the form of a bond.
This allows you to reap the benefits of gold rates as well as interest earned on the bonds at the time of their maturity.
These are issued by the Reserve Bank of India (RBI) and can be bought from your bank.
Before you invest
The tax implications on each of these instruments vary according to the type of investment you choose, as well as, tenure. It is important to analyse the tax liability that you will have to bear, so as to not nullify the higher returns you make.
Please check the tax implications before you decide on an investment.
The article is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.