Here is a poser that can trigger animated discussion, at the end of which no single, clear answer is likely to emerge. In a world roiled by disease, in a scenario marked by oil shocks, in a market hurt by extreme volatility, where should you invest your surplus? The riposte will not come in a hurry either as each respondent will take his time in explaining the rationale that he thinks will support his answer.

Well, here’s something that may be viewed as a somewhat oversimplified but a functional answer. Direct a significant part of your savings to well-rated fixed deposits to secure pre-determined rates of interests. Yes, you have read that correctly — this is indeed the time to buy peace of mind and, in the process, temporarily suspend your belief that actively managed assets will able to fetch you sustainable returns, at least in the foreseeable future.

There appears to be quite a few infallible arguments in favour of such logic at this juncture; the most obvious one stems from the fact that both equity and debt are witnessing enormous uncertainty.

Not every investor can withstand this, not when their portfolios have turned considerably weaker. Indeed, some sections of the investment fraternity will be tempted to opt for fixed-return instruments, ones that offer relative safety and stability with no majorly unknown risks thrown in.

Now, we do understand that such a move will steer these sections away from market-linked returns. In other words, administered rates will once again rear their heads. Yet in a world dominated by large-scale risk, such rates will also serve as a prop for many shaky portfolios. We are particularly referring to investors who are decidedly averse to risk. Accepting risk is an art that a few can truly master, and in times like these, only the most courageous ones can hope to remain afloat.

Remember, influential sections of the economy are already facing a crunch. The scenario is compounded by inflationary pressures, rise in input costs, declining credit quality, poor inflows into infrastructure and so on. There is considerable pressure on rates. Small savings rates, for instance, are getting rationalised even as you read this. In general, yields generated by the popular asset classes are declining.

Go traditional

When the relatively smarter options turn cold, opt for traditional instruments. However, you need to choose wisely. This also means that the average investor should not go in for the typical high yielding deposits only on the basis of the promised rates of interest. A good, hard look at their credit ratings is absolutely necessary too.

There are two very critical considerations for deposit holders. One relates to the payment of interest at periodic intervals, which is typically a source of sustenance for many senior or retired investors.

The other pertains to the repayment of the principal. Any issuer of deposits is obliged to handle both without any delay or default. Any unwarranted interruption will weaken the issuer’s (the borrower in this case) credibility in the market. Consequently, its credit rating will also take a hit.

Any deposit holder (the lender in this case) will have to monitor the issuing institution’s rating profile. A triple-A rating is the most preferred one if you go by the most basic requirement — safety. A well-rated instrument is said to command higher respect in the investor community than the one with a lower rating. The more credit-worthy securities typically offer lower rates. Also, lower rated instruments mostly tend to offer more attractive rates.

The changes in circumstances affecting the issuer will always have a great impact on its rating. It is all quite relative. For instance, typically B-rated instruments are less prone to defaults than those rated below this category. It can be generally stated that uncertainties faced by the issuer can have adverse consequences; they can lead to inability to make timely interest and principal. Such uncertainties can stem from adverse business conditions.

Crucial factors

Forget peace of mind, a rather hackneyed concept even in the best of times. A raft of other reasons will prompt the average individual to allocate more to deposits (especially deposits offered by well-rated financial services companies) at this juncture. Consider the following factors:

Rates promised by small saving schemes — these are considered safe havens by many — are trending lower. The government has already hinted that there will be moderation in small savings rates in keeping with emerging trends. While these rates have been lately held steady, the scenario is expected to change soon.

Quicker transmission of monetary policies adopted by the central bank will lead to lower rates for commercial banks. This is evident right now; witness the latest move initiated by the largest state-held bank in the country. The State Bank of India’s action will serve as an important consideration for others, it is felt.

In the last calendar year alone, the Reserve Bank of India has cut the repo rate by well over 100 basis points. There have been a few inflationary signals (chiefly owing to higher food prices) in recent days, and the declining trend has been arrested. However, this is expected to be merely transitory. In other words, rate cuts will remain a crucial factor if the situation remains conducive for the banking regulator.

The writer is director, Wishlist Capital Advisors

Rating Metre

• AA: High safety. The degree of safety is strong, but not as strong as in the former category
• A: Adequate safety. The degree of safety is satisfactory
• B & C: Inadequate safety. C expresses doubt; a C-rated deposit can potentially default
• D: Either in default or is expected to default at the time of maturity