Sunday, January 30, 2011

Returns from fixed income close to peak

While interest rates are on the rise making loans expensive and inflation throwing household budgets into a tizzy, investors of fixed income schemes have a lot to cheer with gains now well close to the heady levels last seen during the liquidity crunch of 2008.

With banks paying up to 9.8% for one-year certificate of deposits (CDs), retail investors in fixed maturity plans (FMPs) can rake in gains of close to 9.3% now for schemes of a little more than a year. Even liquid funds that offer easy exit options within a short period are giving annualised returns of over 7%, says a top industry official. "The next set of FMPs would perhaps offer the best yields in the one-year time frame," says an investment consultant. 

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"Fixed deposit (FD) and FMP investors should start committing funds now. It's a good time (to invest) as yields (from fixed income) are closer to peak," says a senior official with a fund house that focuses on fixed income schemes. "We are asking investors to lock-in money for the one-year tenure as returns are almost near the top," says Suresh Sadagopan, certified financial planner, Ladder7 Financial Advisories.

Fund houses are continuing their FMP launch blitz cashing in on the high rates. Fund mobilisation by FMPs surged more than six times in January-November 2010 with 257 launches collecting Rs 60,867 crore.

"Investor in debt funds stand to gain (from rate hikes) and FD rates would become better for retail investors in a couple of months," says Lakshmi Iyer, head, fixed income and products, Kotak Mahindra Mutual Fund. SBI revised the interest for term deposits of one year and above from 7.75% to 8.25% only on January 3.

CD rates, the rate at which banks borrow from the market, have increased by over 3% in the past few months as banks increasingly started to tap the market for funds on the back of sagging deposit growth and tight liquidity conditions. 

While rates would remain firm till March as demand for funds from banks during the last quarter is traditionally high, they would start softening from April, say observers. "It may be difficult to predict the peak but investors should take advantage of the firmness in rates."

Source: Times of India

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