I have been receiving queries about investing in fixed income securities. Not sure whether it is an indication that Indians are pulling out of equity markets (read the article on Bloomberg about this) or banks are giving real poor interest rates.
So let me run a series of questions.
1. Should I invest in a bond fund?
this answers the question of whether a bond fund or a bank fixed deposit. So if you are a tax payer, invest in a bond fund and go for the growth option. Simple.
2. Can Mutual funds be guaranteed like a bank fixed deposit?
No. A mutual fund scheme cannot be guaranteed – EVEN – if it is a gilt (government bond fund) fund. We will see later on that the total return in a mutual fund is got by the interest rate at which the money has been lent AND the interest rate fluctuation. Hence a ‘guaranteed’ bond fund will not work, UNLESS it is a fixed maturity plan. However the SEBI rules do not allow for a guarantee to be issued, so the question does not arise.
3. How is a bond fund different from a fixed deposits? are deposits safer?
All investments involve risks. Anybody who forgets to tell you that is just being mean, or assumes you know that. So a bond fund OBVIOUSLY involves more risk than a bank fixed deposit, but is less violent in fluctuation than say an equity fund. A bank fixed deposit, a savings bank account, a recurring deposit, national savings certificates, public provident fund,..et al are all GUARANTEED by the government of India. This is not available for a bond fund. But this comes with the fact that fixed deposits give fixed returns, but bond funds will give better returns when the interest rate cycle is going from a high interest rate cycle (say 8.8% gilt) to a lower interest rate cycle (say 6.4% gilt). THESE ARE INDICATIVE RETURNS ONLY. In the 1970s the US government has paid interest at rates in excess of 11% p.a. FYI.
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