Investment opportunities with low interest rates make it difficult for investors who are looking to park their money in long-term investment instruments. Most investors view low-rated bonds and company fixed deposits as ideal channels to invest their money in. However, the risk element associated with these channels can be eliminated to a certain extent by opting for credit opportunities funds.
Credit opportunities funds offer a substantial amount of liquidity to investors, along with a diversified portfolio for reducing risk.
Fluctuations in Interest Rates
Investors in the Indian financial domain have seen fixed deposit interest rates decline over the past few years. In April 2015, SBI offered 8.25% interest on FDs, while the rate in 2017 stands at 6.9%. The rates for medium to long-term deposits were reduced by SBI recently.
The decline in FD interest rates compelled investors to move towards long term gilt funds. These funds offer 10.6% returns, but have the disadvantage of being associated with high risks. Long-term bonds have also caused losses for investors in the recent past, making them look out for other alternatives.
High Paying Fixed Deposits
Fixed deposits offered by non-banking financial institutions, such as corporates, are a good investment option when interest rates are concerned. Interest rates of up to 7.5% are offered by these FDs currently.
If an investor is looking to get an interest rate beyond 8%, he/she should explore investing in a long-term FD with tenure of 2-3 years. However, this investment exposes the individual to certain risks. One of these risks include the reduced liquidity of the funds. Also, the penal interest charged for premature withdrawal is very high. Another disadvantage is that if the interest climbs up in the interim, the investor cannot enjoy this benefit till the end of the FD tenure. This is because the interest rate pertaining to the FD is according to the contractual agreement.
Investment in Bond Funds
A great way to maximize the returns on your invested amount is to opt for bond funds that mature at varying intervals. The staggered maturity dates enable the fund manager to reinvest some amount at higher interest rates when the rates show a rising trend. The fund manager will be able to invest the proceeds from maturing funds in the best possible options available at that time.
The interest accrued on FDs are added to the income of the investor and taxed at a marginal rate of tax. On the other hand, the returns from bond funds with tenure of 3 years and above are considered long-term capital gains and are taxed at a lower rate. However, investors should read the fine print carefully before investing in bond funds.
Credit Opportunities Funds
Credit opportunities funds invest in bonds with lower ratings, i.e., A and AA rated bonds that offer higher returns with added risk that the investor has to bear. Majority of these schemes are open-ended as well. Investors can enter and exit at their convenience, as there is no lock-in period. Effectively, these schemes are most appropriate for investors with a high risk appetite.
The name of the scheme is also not indicative of the returns and associated risks. The same credit opportunities fund may invest in a low risk low returns instrument or a high risk instrument providing higher returns.
In a nutshell, credit opportunities funds can increase your returns over the next few years if you are judicious in your assessment.