How to invest amid rising rates

The Reserve Bank of India increased the repo rates by 25 basis points to 6.50 per cent in February, taking the total hike to 250 basis points since May last year. Inflation is a global phenomenon & India is no exception. Rising interest rates affect different segments of the economy in different ways. For borrowers, the increase in rates makes loans expensive. For the savers, high-interest rates are a windfall. So, what are the investment avenues for savers? Let’s demystify the various options available to you & how you can take advantage of the rising interest rates.

Fixed deposits

Banks, which include private sector, public sector and small payment banks, have been competing with each other in increasing interest rates on deposits in recent months to meet a growing credit demand which has outpaced deposit growth. They are offering rates between 7 to 8 per cent for varying periods & depositors have been literally laughing all the way to the bank. In a first of its kind, Punjab & Sind Bank has gone a step ahead & offered an additional 0.25 percent more on its PSB Utkarsh 222 days FD scheme deposits that are done through the online mode. Deposits done through the branch fetch 7.75 per cent. Almost all banks offer an additional 50 basis points on deposits for senior citizens. Bank deposits are insured up to Rs 5 lakhs by Deposit Insurance & Credit Guarantee Corporation (DICGC). You should lock in FDs for the longest tenure possible to take advantage of high-interest rates.

For those willing to take a higher risk, you can think of investing in company FDs offered by Corporates & NBFCs. Company FDs offer higher interest rates ranging from 0.25 to 0.50 per cent over bank FDs but they are not covered by DICGC & in the event of default, you may not get anything. You can minimise the risk by investing in FDs with higher ratings. Getting an additional 0.50 per cent or Rs 5000 on an investment of Rs 10 lakhs is not worth taking the risk.

Non-convertible debentures or bonds

You can also invest in non-convertible debentures (NCDs) or bonds issued by companies. Recently an NBFC came out with a public issue of secured redeemable NCDs which were rated AA stable, with varying tenures & offering a coupon rate of 10.15 per cent. Since there is a default risk you can minimise the risk by investing in NCDs with higher ratings.

You can also consider investing in RBI floating rate bonds which have a tenure of 7 years and the current interest rate is 7.35 per cent. The interest rate is linked to the rate on National Savings Certificates (NSCs) and offers 0.35 per cent more than NSCs.

Debt Funds

With the interest rate cycle close to the peak after the series of repo rate hikes, this is the right time to invest in debt funds. The yield on the 10-year G-Sec has stabilised around 7.30 per cent levels and investors can think of investing in debt funds. The mantra is to stay invested in long-duration funds, since their NAV will rise faster, as interest rates start heading south. Give your investment a time of 2 to 3 years for the theme to play out and gains to be realised. Debt funds are more tax efficient than bank FDs or NCDs, as you can claim indexation benefits if you hold them for more than 36 months.

The government seems to have acknowledged the plight of senior citizens, finally. With no social security measures in place, most of them depend on interest income to take care of their expenses. The government has hiked the interest rate on senior citizens’ savings scheme to 8 per cent while doubling the maximum amount to Rs 30 lakhs per individual. The additional Rs 15 lakhs can be invested from April 1, 2023. Jointly you can invest a maximum amount of Rs 60 lakhs between you & your spouse and earn an interest income of Rs 4.80 lakhs which translates to a monthly income of Rs40,000. Senior citizens who are looking at the safety of their investment can also contemplate investing in the Monthly income scheme (MIS) which has a tenure of 5 years & interest rate of 7.10 per cent. The maximum amount has been increased from Rs 4.50 lakhs to Rs 9 lakhs singly & from Rs 9 lakhs to Rs 15 lakhs jointly from April 1, 2023. Senior citizens can also claim interest deductions up to Rs 50,000 under Section 80 TTB of the IT Act.

(The writer is a CFA and a former banker, currently teaching at Manipal Academy of Higher Education, Bengaluru)