FMPs good bet in high interest rate regime

MUMBAI: Higher inflation mostly draws murmurs from conservative investors who park their money in fixed deposits, company deposits, debt mutual funds and so on. The familiar line of complaint being the returns often fail to catch up with the rate of inflation- especially if one works out the returns after accounting for income tax.
With inflation in the vicinity of 9%, the scenario is not any different this time.According to investment advisors, they get queries regularly from investors looking for higher returns to beat the likely higher inflation in future.
"Inflation going up in the short term is a possibility. For example, oil prices continue to be high and if the government chooses to pass it on after the elections, there could be a spurt in inflation in the short term," says Lovaii Navlakhi, MD & chief financial planner, International Money Matters, a Bangalore-based financial firm. "However, fundamentally you won't have only inflation ruling high in the long term. Either it will come down or deposit rates would catch up with it," he adds.
Experts also believe that fixed income investors had a good time in the recent past because of rising interest rates. "This is really a good time for fixed income investors. After a long time they are getting real rate of returns," says Maneesh Dangi, head of fixed income, Birla Sun Life Mutual Fund. "The inflation has been in the band of 6-8% in the last one year, whereas the rate of one-year CD has gone up from 5% to 10%. For example, a one-year CD is quoting around 9.80% at the moment," he adds. He also thinks that fixed income investors are likely to benefit more if the inflation continues to remain high in the next one year. "If we take the average inflation of 7.5% and compare it with one-year short-term rate of 10%, that is a spread of around 250 basis points (2.5%). After a long period instead of negative returns, investors are getting +2.5% real rate of returns (the real rate of return is the rate of return minus the inflation).
He recommends liquid, liquid plus scheme, fixed maturity plans (FMP) and short-term bonds to investors. "I think short term bond schemes will work this time because the rates are stable but high. These schemes would be badly affected if the rates were to come down." Lovaii also makes a case for short term bonds though he is not enthused about FMPs because he believes they would lose their charm once the Direct Taxes Code (DTC) comes into effect. "Investors can look at good company fixed deposits also. If a good quality company is offering 10% for a three-year deposit, it is quite attractive," he says. He also asks investors not to lock in their entire money. "Depending on your need and time horizon, you can lock-in a part of your corpus. But set aside some money for attractive offers like SBI Bonds that may come your way," he adds.