Investment avenues to help you get inflation-beating returns

With strict lockdown restrictions imposed by many state governments, economic activity is bound to slow down, which was showing signs of recovery. Given the crisis in the country, inflation rates are expected to go up further as the country reels under the second wave of Covid 19. In such a scenario, how are the debt funds expected to perform and where should one invest to get inflation-beating returns in this financial year?

Retail inflation stood at 5.52% in March, compared to 5.03% in February, driven by an increase in fuel and transportation costs. Now compare this with one year fixed deposits offered by the banks. State Bank of India offers 5%. If you are a senior citizen, the bank may offer you a quarter percent more. However, given high inflation rates, if one chooses to invest in a fixed deposit, the real yield is negative. This is because any income earned as interest is eaten away by high inflation rates, leaving nothing in the hands of investors. Worse, if we add tax paid on the interest rates, then it leaves the investors poorer.

“Interest rates have come down and in this kind of economic environment, they are likely to remain low. They will rise marginally, but not much. Hence, debt investors will have to be geared for a lower return on their portfolio,” Nilesh Shah, MD of Kotak Mahindra AMC told Money9.

Lovaii Navlakhi, CEO and founder of International Money Matters, said: “The chances of interest rates going further down from its already decade-low levels are very thin.”

Where to invest in 2021-22?

Experts say you need to relook your debt fund strategy in order to earn a higher return. Shah said, “My recommendation to investors is to look at credit risk funds. They got a bad name in the last year because of those couple of schemes going for winding down. But if you see the return of credit risk fund over the last three years, five years it is still reasonably good. If your risk profile does not permit you to invest in a credit risk fund, please consider a dynamic bond fund. Their returns fluctuate, but over the period a good fund manager delivers a good return by managing interest rate risk. My general recommendation to debt investors will be that you won’t be able to perform inflation by remaining investing in debt. You will have to take some risks. Either it’s credit risk in a credit risk fund or it’s interest rate risk in a dynamic bond fund. Or it is equity fund in hybrid funds like balance advantage funds or conservative debt hybrid schemes.

Credit risk funds is a type of debt fund that deploys at least 65% of the portfolio in AA or below rated debt securities. Dynamic bond funds take advantage of fluctuating interest rates by altering the allocation between short-term and long-term bonds.

Investment options

For those who want to reduce default risk, Navlakhi added, “In our view, any investor who wants to capitalise on the interest rate movements in long term, should opt for medium or long duration debt mutual funds that offer a diversified portfolio across many institutions with preference to highest quality papers (i.e., AAA, Sovereign). This reduces concentration as well as default risk to a great extent. In terms of taxation, an investor also receives indexation benefits from debt mutual funds. My recommendation to debt investors would be also to consider REITs and InVITs. These are again hybrid instruments and they can still deliver a good return.”