View on Debt Market: For the Retail Investor

Everyone is worried about the volatility in the equity market and where they are headed in the short term. Though there seems to be an unanimous consensus that they are headed up in the long term.
We thought of writing about the position of the Debt market from the point of view of a Retail Investor.
Fixed Deposits have been the favourite mode of investment for retail investors in India. Retail investors also have exposure to the Indian Debt Market through either Corporate Debt or Debt Mutual Funds. Some of them invest in Government Securities also through Gilt Mutual Funds.
The interest rates have been heading north in India for almost an year now with RBI hiking the repo rates 11 times since March 2010. Repo Rate is the rate at which RBI lends to banks. It currently stands at 8%.
This has increased the returns on Fixed Instruments with Fixed Deposits offering 9.75%-10.50% for one year deposits against a interest of 6.50%-7%, one year back. Till one week back most analysts anticipated RBI to further hike the repo rate in September. However, with a downgrade in the ratings of US Government securities from AAA to AA+, the markets seem to have changed. 
Equity markets have no doubt fallen and will witness bouts of volatility in the near term. What is interesting to note is that the prices of commodities(except Gold) and crude have also fallen because of the negative outlook from US and European countries with respect to their economic growth.
The direct impact of this would be lower prices and lower inflation, which argues positively for India. Now, the consensus among analysts is that interest rates have peaked and they would either stabalise at this rate of start heading south once the inflation numbers fall. 
MAKE MONEY FROM EQUITIES...AS WELL AS DEBT
WHAT SHOULD YOU DO?What this means for a retail investor is that, he should look to lock-in a larger portion of his fixed deposits at the prevailing higher rates for the next 2-3 years. Luckily for the retail investor, a number of companies are coming out with Non-Convertible Debentures (NCDs) in the coming weeks. They can also be evaluated and selectively invested in to enjoy rate higher than bank FDs.
Those taking exposure to Government Securities, they have missed the bus. For now at least. When the Government Bond Yields were trading in the 8.25-8.30% range, we had advised our clients with surplus funds to take some exposure to these securities. The decision of RBI to hike the repo rates by 50 bps to 8% on 26th July, 2011(instead of the expected increase of 25 bps) shifted the Government Bond Yields to the 8.42-8.49% range. This presented another opportunity to take exposure to these bonds. But it was short lived. The US downgrade has ensured that Yields on Government Bonds in India have now fallen to the 8.20-8.25% range. Had one invested when the Yields were in the higher 8.42-8.49% range, they would have made a decent profit on risk-free securities in a short span of time.
For those investing in Debt Mutual Funds, all you have to do is select a good fund and let the Fund Manager take all the calls with respect to the selection and tenure debt securities in the Fund. Birla SunLife Mutual Fund, has been able to do a decent job in this regard in the recent past. Birla SunLife Dynamic Bond Fund is a good example. (Note: Investing in Debt Funds to take advantage of the movements in the Interest rate cycle is a riskier strategy compared to investing in FDs. It should be undertaken through proper financial advice).
Just like Equities, the Debt market also presents opportunities to make a decent profits at lower levels of risk. And it works well to diversify your portfolio into debt products as well.We, at Wealth Cafe, believe that one must invest in Equities and if at all he must trade, he must trade in debt.
Happy Investing.
Feel free to share your thoughts.


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