ETMarkets Smart Talk | Have money in FDs? Why retail investors should consider 7-7.25% bond yields: Amit Somani

With the RBI keeping the repo rate unchanged at 5.25% and signalling a prolonged pause in the interest-rate cycle, retail investors may be wondering whether to continue parking money in fixed deposits or look beyond traditional savings avenues.

Amit Somani, Deputy Head – Fixed Income at Tata Asset Management, believes bond yields of around 7-7.25% remain attractive, with short-term instruments still offering a meaningful spread over the repo rate.

He believes the current environment offers an opportunity to lock in yields rather than wait for a marginal rise in rates, while investors with a three-year horizon could consider longer-duration bond funds such as corporate bond and G-sec funds.


For investors seeking diversification and liquidity, Somani also explains why bond funds may make more sense than buying individual bonds. Edited Excerpts –

Q ) What is your take on the MPC policy meeting outcome? Do you see interest rates going higher or lower?

A) The RBI MPC unanimously maintained policy rates in line with market expectations while retaining the policy stance as neutral. The repo rate has been kept unchanged at 5.25%.

The measures announced in the previous policy to attract foreign flows continue to have a positive influence on macro stability. At the same time, uncertainties around energy prices and supply chain disruptions arising from the West Asia conflict continue to pose risks. The progress of the Southwest monsoon also remains an important factor influencing the growth outlook. Considering the above factors, the MPC outcome appears to be well balanced. It strikes the right balance between supporting growth while maintaining a close watch on inflation.

Going forward, the RBI will continue to monitor incoming macroeconomic data before taking any further policy action. At this point, we appear to be entering a prolonged pause in the interest rate cycle, with rates unlikely to move meaningfully either higher or lower in the near term. Any change in the policy rate is likely to be pushed into the next fiscal.

Q) With the RBI repo rate at 5.25%, are we still in an environment where investors can lock in attractive yields, or has the best part of the rate cycle already passed?

A) Yields continue to remain attractive given that most short-term instruments, including one-year to three-year bonds, continue to trade about 175-200 basis points above the repo rate.

This remains at a historically high level, although it is lower than the recent peak that we have seen a couple of months ago when aggressive measures were announced to attract US dollars.

Thus, it remains an attractive opportunity for investors looking to lock in current yields as per their investment time horizon.

For instance, short-term investors with an investment horizon of upto 3-6 months can look at Ultra category, while investors with longer term time horizon of 1 year and over can look at Corporate Bond Fund or G-sec Fund category.

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Q) Is it better to lock in a 7% yield on a high-quality bond today or wait for potentially higher yields if inflation or oil prices push rates up?

A) As mentioned, the yields continue to remain attractive at around 7.00% to 7.25%, which is almost 175 to 200 basis points above the overnight rates.

Oil prices have settled around USD 80–90 per barrel after touching a peak of around USD 110 per barrel during the height of the West Asia conflict.

While inflation did see some impact from the rise in oil prices, the current pressure from oil prices on inflation is low given that the oil prices are now lower than what it were a couple of months ago. At present, monsoon has a greater bearing on domestic inflation than oil prices.

As far as locking in yields at around 7% –7.25% versus waiting for a possible rise if inflation were to move higher, the loss of accrual income from waiting may far outweigh the potential benefit of slightly higher yields. Therefore, I think this is a good time to lock in yields at current levels.

Q) If you had ₹1 crore to deploy in fixed income today with a three-year horizon, how would you construct the portfolio?

A) A three-year time horizon is a decent investment horizon from a fixed-income perspective. Therefore, products that take exposure to longer-term bonds, such as Corporate Bond Fund or G-sec Fund suits. However, certain small portion, say 5-10% can be invested in ultra category funds to take care of unexpected/ emergency requirement.

Q) How should investors divide their fixed-income allocation between government bonds, AAA corporate bonds, credit opportunities and money-market instruments?

A) This really depends on the investor's investment time horizon and risk appetite. Money market Instruments are suitable for Investors having shorter-term time horizon, while Investors with longer term time horizon can take exposure to other mentioned instruments.

Additional factor that would support credit opportunities category is large inflows through Foreign Currency Non-Resident Account (FCNR) deposits into the banking system. This will further support in keeping the credit environment benign.

Q) Do you think bond funds make more sense than buying individual bonds, and when does direct bond ownership have an advantage?

A) Direct bond ownership has an advantage only when you know exactly when you will need your money. For example, if you know that you will need the money after three years, you can simply buy a three-year maturity bond. The bond matures, and you can then utilise the proceeds.

However, if one does not have that clarity, then in almost every other situation, a Bond Fund makes more sense than buying individual bonds. It offers ready Liquidity at any point. Even if you initially think you will need the money after three years, circumstances may change.

For example, after one year, you may need the money due to an emergency or come across a better investment opportunity. In that case, you can simply redeem your investment in the bond fund for the desired amount (partial or full) and utilise the proceeds or shift your allocation immediately.

While high-quality bonds are generally liquid, the amount one invests, and the exit requirements may not always match. Sometimes there can be a mismatch while exiting a bond. Therefore, a Bond Fund offers a much simpler and more convenient investment option for investors who do not have certainty around the timing or cashflow needs or amount of cash flow required.

Read more: ETMarkets Smart Talk| Bonds vs debt funds vs FDs: Sandeep Yadav explains the tax trade-offs investors should know

Q) How important is tax efficiency when comparing FDs, bonds, debt mutual funds and government securities?

A) Post the tax amendment for Debt mutual funds in 2023, all of these products are now treated similarly from a taxation perspective. All are taxed at the investor's marginal rate of tax. In other words, each of these products have similar tax treatment.

Q) What is the biggest misconception about bonds in India today—that they are boring, low-return investments?

A) The biggest misconception about investing in bonds or bond funds is that they are low-return investments. They should be viewed from an asset allocation perspective for potential diversification while generating relatively steadier real rate returns (returns adjusted for inflation) compared to equity funds.

Every portfolio should have an allocation across different asset classes to help manage volatility and address various liquidity and return needs.

For instance, a 30-year-old investor may be investing for long-term goals such as buying a house, funding a child's education or planning a vacation. While different asset classes may help create potential long-term wealth, there could be periods when funds are needed unexpectedly - for example, due to a medical emergency or illness in the family. This may coincide with volatile market times.

In such situations, the fixed-income portion may be liquidated without forcing the investor to exit other asset classes at an unfavourable time.

Therefore, bond investments should not be viewed merely as low-return investments. Instead, they should be seen as instruments that provide potential diversification and relative stability as compared to equity funds.

Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management Pvt. Ltd. will not be liable in any manner for the consequences of such action taken by you. Please consult your Mutual Fund Distributor before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund. The view expressed are based on the current market scenario and the same is subject to change. There are no guaranteed or assured returns under any of the scheme of Tata mutual Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)