Fixed-income is in a tizzy again. A further rationalisation of rates will cause considerable inconvenience for investors, especially the small ones who mostly view fixed-income instruments as veritable conduits for household savings. Limited by a dearth of viable alternatives, and challenged by declining yields and increased uncertainty in the markets, they are faced with a problem so acute that it cannot readily be solved in the foreseeable future.

A volatile equity market, poor credit quality on the debt front and higher food inflation topped by a sluggish economy have together spawned a menace that is weakening portfolios everywhere. Little is being promised by the government by way of relief and the scenario is compelling investors to pare their expectations from all popular asset classes.

As debates over the ideal way forward turn seemingly endless, ordinary investors feel particularly wary of the small savings rates; some rates are expected to be pared over the next few quarters in keeping with the overall trend. Rates of small savings schemes have been held steady by the authorities in the current season, but such stability may not continue for long, it is felt.

Various sections, including bankers who believe higher fixed-income rates elsewhere will wean away their deposits, have expressed divergent views on rate realignments. The primary discussion, however, revolves around the strategies that investors need to follow during uncertain times as these.

Let us chart a few of the possible courses of action.

⚫ Diversify your portfolio in line with your risk profile. This should ideally determine your asset allocation, leaving room for both fixed-income securities and market-linked debt instruments.

⚫ If you have no time to choose the best market-linked assets or are constrained by poor knowledge, pick up debt funds and create your portfolio accordingly. The idea is to optimise your exposure to professionally managed debt even while holding on to such basic principles as stability of income and easy liquidity.

⚫ Even as you identify income-bearing products, do not ignore a very serious issue that has lately plagued the country’s debt market — credit quality of securities. The dearth of good credit (read: availability of well-rated paper) has posed a challenge for investors in the past. This time, the challenge is infinitely more acute; never in the history of the nation’s debt market have so many issuers disappointed their investors in such a manner.

⚫ Each of your actively managed debt holdings needs to match a relevant time horizon. In other words, there are a slew of products that will meet your short, medium and long-term objectives. Select carefully; you should include the ones that match your objectives in the most emphatic manner.

If you just hold traditional saving instruments passively, you will not have to worry much as yields will be generally known to you at the very beginning. This is particularly relevant for those who are keen on government-administered options. Instruments offered by the post offices are examples that come to the mind. Investors nevertheless have to contend with a number of limitations as far as small savings schemes are concerned.

Don’t wait for revisions

There is considerable pressure on the system to ensure quicker transmission of the banking regulator’s monetary policy. In this day and age, that will ultimately translate into a downward motion at the consumers’ end. Indeed, interest rates on schemes are being revised periodically by the authorities, but prudent investors should not wait for the current decline to have its full impact on their finances. Instead, they need to look for smart alternatives to sustain their portfolios. (See chart)

The most obvious option that springs to the mind stems from higher rates offered by a raft of specialist fixed deposit mobilisers. Yes, many of these are private players in the financial services space; housing finance companies, for instance, typically offer relatively superior rates.

Investors who are focused chiefly on government-administered savings products will not make the transition to other products in a hurry, and a full-blown transition is not actually being recommended. Nevertheless, you can make a beginning by identifying deposits offered by the most reliable players. take for example, the triple A products of select companies, those that operate at the very top of their respective areas of specialisation.

There are quick rate revisions happening in the private space as well at the current juncture. A few of the leading home finance outfits have already done it in recent months, and at least a couple of others are likely to do so in the coming weeks.

Hence, options are shrinking in the private space as well, and the time for you to take action is now. Those who wait needlessly for a a clear trend to emerge will be doing themselves a disservice.

The Reserve Bank of India, in its bid to tame inflation, has already taken several stringent, purposeful steps. It has also indicated that there may well be room for bringing down interest rates further. Calendar year 2019 saw the banking regulator roll back the policy repo rate by more than one hundred basis points. (See chart)

Stronger inflationary pressures have in all probabilities temporarily stopped the policymakers from taking fresh action on this front.

Meanwhile, traditional deposits offered by most bankers provide around 6 per cent. To sum it up, this is not a very happy scenario for our teeming millions.

The writer is director, Wishlist Capital Advisers