Offence is the best defence. The standard mantra for classical military strategists now has an echo-chamber — the aggressive stance being deployed by depositors these days, thanks to a different tune played by the banking regulator. Indeed, the RBI’s latest policy has changed the way most fixed-income instruments are being viewed by investors. Gone are the modest rates of yore; for yield hunters, these are liberated times.

Deposit schemes of various sorts are currently vying for attention. Administered-rate options offered by the postal department, collectively termed as ‘small savings schemes’, for instance have gained traction in recent days because of their considerably higher rates. SFBs or small finance banks have gone a step ahead than many others, particularly traditional commercial banks, in offering superlative returns on deposits.

In short, the average depositor is today happier than what he was till recently.

We will not delve into the circumstances that led to these changes. Nor will we analyse the reasons. This Monday, we will try to understand the common investor’s psyche, and lead him towards relevant and strategic goals in this market.

Questions for fixed-income

Circumstances in the market for fixed income bearing securities are currently not so easy for the average participant. In the days to come, a few serious issues will determine how savers will invest on this front. For them, here are a few fundamental questions.

• Who is the issuer of the security? To use a more everyday term, what is the “promoter’s profile”? A good, hard look at their business is also recommended.
• What are the important terms and conditions of the issue? In other words, how will the repayment happen? What is the interest payment frequency? What is the tenure of the debt instrument?
• What is the score in terms of the overall creditworthiness? Is the borrower disciplined enough to pay back? Should the investor feel concerned in any way about the other party’s ability to repay?

Answers ahoy!

You will no doubt notice that we have not mentioned “credit rating” in our narrative. Not so far, but we now wish to underscore its significance in the competitive world of delayed payments, non-payments, complete bankruptcies and the other very obvious fallout — legal tangles. Of course, many committed players diligently pay right on time, in keeping with official payment schedules. However, we will reserve our comment on them for the time being.

The fixed-income investor must keep an eye on rating changes, if any. So a close watch (for the latest on a possible downgrade or upgrade) on the goings-on is essential.

The last few years have thrown up a number of cases where ratings have turned worse quite suddenly. That is not joyous news for the investor concerned.

We did refer to diversification a while ago, remember. In the context of credit rating, all elements of one’s diversified fixed-income portfolio will not carry similar ratings. In the practical world, this is a rather difficult practice to follow unless there is a specific mandate to determine investment style and substance.

The problem can be somewhat solved if professional fund managers are involved and specific kinds of funds are acquired. A fund that must invest in only AAA-rated paper (or equivalent) will follow its mandated pattern. Or so we expect.

In these circumstances, the ability to select correctly becomes critical. Whether an investor chooses bank deposits or corporate bonds, the process of selection must be genuine and comprehensive. Wrong choices will wreck smart plans, just as bad moves will lose you pawns and rooks on a chessboard. The ordinary player’s endgame should never be tragic.

The chessboard analogy may not appeal to those who have other games in mind. Regardless of rate hikes, investing actively in the fixed-income segment is now fraught with risks of a higher magnitude.

The prime worry today relates to under-performance. In the debt funds market, a number of players are delivering pedestrian performance. As for investors, the situation is not likely to change for the better anytime soon.

A few points are worth your consideration:

• Stay put in administered-rate schemes for at least 7.5-8 per cent returns.
• Incremental allocation may be considered in favour of corporate deposits. These may yield 8-8.50 per cent.
• Select debentures may offer higher; 9.5-10 per cent is not ruled out
• Debt funds (in the present circumstances) are not likely to provide more than 7-8 per cent. Short term options are characteristically better compared to medium- or long-term debt funds.

This will prompt investors to limit themselves to money market funds, liquid funds and ultra short term funds.

All three product categories have assumed significance in recent quarters. The point to be noted here is that the government has changed regulations with respect to indexation benefit.

In an inflationary environment, indexation may well have appeared as a succour for investors.