Seek short-tenure fixed deposits

Conventional fixed deposits and other assured returns schemes have witnessed falling returns, thanks to the soft interest regime. And the section of investors, which is essentially risk-averse and prefers to invest in such instruments, is facing tough times.

While these investors are running out of options, impressive returns posted by market-linked instruments are adding insult to injury.

Investing in instruments like monthly income plans (MIPs) would mean entering a zone which is radically different from their risk profile. Striking a balance between 'attractive' assured returns and yet retaining low risk levels is proving to be a tough task.

Let's study the present scenario and see what is the best recourse available to investors. The view that interest rates have bottomed out and further rate cuts are unlikely, is endorsed by a large number of industry experts.

Secondly, the economy is doing well, which implies that sooner or later there will be additional demand for capital (this would put upward pressure on rates). One can safely conclude from these factors that there is a fair chance of interest rates moving up in the days ahead.

So how should investors position themselves to benefit from the given situation?

The key lies in investing in assured returns instruments with a shorter tenure, like fixed deposits. Investors should consider investing in fixed deposits with a shorter tenure like one year or maybe even six months. The idea is to enhance your flexibility to the highest level possible. If and when the interest rates move upwards, investors can conveniently shift their holdings to deposits offering higher rates.

Critics might argue that the returns offered under these schemes are too insignificant. And they are right in holding such a view. However, we are trying to build an optimal solution that offers both assured returns and liquidity. Undoubtedly a 3-year fixed deposit looks more attractive, but then interest rates rising in the meanwhile would mean an opportunity loss for the investor.

This problem is further magnified in the case of government savings schemes like the Kisan Vikas Patra which have an investment tenure of 8 years 7 months. The interest rates can move up significantly over this period making your investments redundant.

For investors who are willing to be a bit more enterprising, floating rate can be a useful option. Similarly, those who are willing to take on slightly enhanced risk levels, some of the conservative MIPs can be considered. However, if you are an investor who rigidly believes in assured returns schemes, short-term fixed deposits are the place to be.

Monitor the situation closely and renew your deposits at regular intervals, it's your best chance to beat the interest rates blues.