My blog and most of my posts refer to equity investments. I have once in a while posted on real estate. However fixed income investments are a fair percentage of my portfolio. The reason I don’t post much on fixed income investments is because there is not much I can do to generate extra returns in proportion to the time and effort I will have to spend on it.
The fixed income options available to me are
- Bank FD : this is almost a no brainer and the most passive form of investmtent. However I don’t chase returns blindly. I typically hold deposits in only the Top banks and avoid the second tier banks and co-operatives. The extra 1-2% return is not worth the risk. In addition, I tend to look at the capital adequacy ratio (CAR) and the NPA levels of the bank, before going ahead with the FD. The name or reputation of the bank alone is not sufficient. Typically the CAR levels of the bank should be above 8-9 % (TIER I) and NPA levels below 1-2 %.
- Company bonds : The next avenue for fixed income investing is company bonds. I have invested in company bonds and FD’s in the past when the interest rates were higher and it was possible for me to process the paperwork. However since 2000, partly due to the amount of paperwork involved then (there was no Demat for bonds) and due to the easy of investing in mutual funds , I stopped looking at company bonds and FD’s. Also due to the high profile failure of some of the companies and the losses incurred by the bondholders, I kind of lost interest in company FD’s and bonds. The key factors to look at when investing in such instruments is the interest coverage ratio ( PBIT/ Interest expense ) which should atleast be 4, Debt equity ratio for the company ( < 0.5 if possible) and debt rating by the rating agencies such as Crisil (invest in AAA or AA+ only).
- Mutual funds – fixed income: This is my favored avenue during a falling rate scenario and I tend to invest with well know mutual fund houses such as franklin templeton, DSP etc. At the time of investing in a debt mutual fund, I tend to look at the following factors
o Asset under management – avoid investing in funds with low level of asset as the expense ratios could be high.
o Fund expense – lower the better. Although the indian mutual fund industry typically gouges its customers and charges too high compared to the returns.
o Duration of fund – This is the average duration of the fund. A fund with longer duration will rise or fall more when interest rates change
o Fund rating – 80-90% of the fund holding should be in p1+ or AAA / AA+ securities.
o Long term performance of the fund versus the benchmark
- Mutual funds – floating rate funds : This is my favored approach in a rising rate scenario. In addition to all the factors for the fixed income mutual funds, I also tend to favor floaters with shorter duration.
- Post office : Nothing much to analyse in this option other than it was an attractive option a few years back when the Post office offered better rates than available in the market. Currently the 8-9% per annum for the 6 year duration is not attractive enough.
- FMP (fixed maturity plan) : I have just heard about it and have yet to understand about this investment option.
Finally in terms of tax effectiveness, debt based mutual funds are the most efficient as they are subject to long term tax rate after 1 year.