The benchmark 10-year government securities (G-Sec) yield which sets the tone of the fixed-income market underwent wide fluctuations over the past months. It reached near 9% on 28th August and subsequently declined to near 8% on 19th September. After RBI’s mid-quarter credit policy review on 20th September, the 10-year G-Sec yield has risen and ended at 8.87% on 23rd September. RBI hiked the repo rate by 25bps (basis points) to 7.5% indicating its concerns about high inflation even in an anaemic growth environment.
Mutual fund companies are filing draft documents with SEBI to launch new fixed maturity plans (FMPs) to cash in on higher rates in the market. FMPs are being touted as an alternative to bank FDs. These have distinct tax advantages over bank FDs certainly for those in higher tax brackets; but FMPs cannot beat bank FDs in transparency, safety, returns and liquidity, in case of premature withdrawal. Exercise caution before you decide to invest in FMPs as your investment will be almost illiquid before maturity.
Those in the 20%-30% tax bracket can invest some part of their debt portfolio in ‘low risk’-rated (colour-code blue) FMPs with a good mutual fund house. The market, currently offers a mix of FMPs with maturity periods of three months to three years. A growth-option FMP with 366 days duration is popular as it has the benefit of long-term capital gains (LTCG) with indexation. Short-term interest rates being high will ensure good returns for 366-day FMPs. If the FMP invests in certificates of deposit (CD) issued by nationalised banks, the risk should be low.
Yields for bonds maturing over the next three years have been above 10%—higher than bank FD rates. With 10-year G-Sec yields rising after RBI’s policy review on 20th September, corporate bond yields should start getting attractive. Tata Motors’ bond is rated AA and, hence, is a higher risk than AAA rated bonds.