Overview
We all know that equity
plays an important role in long term wealth generation and should be a large part
of one’s asset allocation in the longer term. However, after the recent RBI
measures scenario debt instruments have become more attractive than ever due to
their dual capability of providing tax efficient returns while at the same time
providing stability to the overall portfolio through diversification. Also,
companies are coming up with very attractive coupon rate for their NCDs which
apart from their attractive yield also generate good capital gains as most of
these NCDs are also traded in secondary market.
Popular Modes of
Investing in Debt
·
Debt Mutual Funds
·
Company’s NCDs/Bonds
Benefits of Debt
Instrument in Current Scenario
·
Higher yields
·
Safe Heaven
·
Highly liquid debt
instruments in offering
· Good chance of
handsome capital gains on debt fund as interest rate cycle reaches its peak
level
·
Portfolio
Diversification
Recent RBI Measures Have
Spooked Markets
- RBI has recently hiked the MSF rate by 200 bps to 10.25%. MSF is the penalty rate at which banks can borrow over repo rate (earlier it was 100 bps over repo rate).
- The central bank also imposed an overall cap of Rs 75000 Cr on Liquidity Adjustment Factor (LAF) borrowing.
- Sale of Government of India securities was also announced to drain liquidity.
- Further on July 23rd the cap on LAF borrowing was brought down to 0.5% of NDTL and CRR maintenance requirements
Indian markets were caught off guard with this
move and rates jumped in an almost unprecedented manner.
•
Short term rates shot up by ~300 bps
•
Rates on the long end jumped by ~90 bps
Measures May be Temporary
We believe that recent RBI measures are temporary for the
following reasons:
·
Higher rates along
with slow growth can damage banks and corporate India balance sheet.
·
All policy makers conveying
that measures are temporary in nature.
·
Key rates are still
untouched which means these are temporary measures and intention is not to hike
rates.
Our Advice to
Investors
We strongly recommend
investors to use a part of their investment in debt and switch to equity in
phased manner to maximize returns. While traditional Instruments like FDs, Bond
are not volatile but they are not tax efficient too. We believe that Mutual Funds are the best
option owing to Tax Benefits and professional management. Also, due care should
be taken to rebalance the portfolio in timely and phased manner.
By Rajat Gupta– Research Analyst – Concept Securities Private Limited
