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Move beyond debt instruments

With inflation inching up every passing week, fixed income instruments including debt funds no longer make a good buy for investors, reports Sandeep Singh.

business Updated: May 16, 2008 21:11 IST
Sandeep Singh

With inflation inching up every passing week, fixed income instruments including debt funds no longer make a good buy for investors. These options will likely keep investors at a loss if prices continue to rise at the current pace, leaving real returns from debt funds and other fixed income instruments in negative territory. What should an investor do in such a scenario?

“While inflation is rising one needs to look to make more money than the inflation in order to sustain himself,” said Surya Bhatia, a Delhi-based financial planner. “Anything less than 7.8 per cent in the current scheme of things actually make you lose money, so one should look for at least 8.5 per cent post-tax return.”

With inflation at 7.83 per cent, avoid keeping money in savings account. Even the likes of term-deposits, PPF, post office deposits and debt funds can’t make your savings rewarding.

A basket of commodity costing Rs 100 today will cost Rs 107.8 a year ahead, if inflation stays at the current level. So if your investment of Rs 100 makes less than that in a year from now, it is better to spend it today rather than save it for tomorrow.

“Investors can go for debt investments but for the shorter duration ones, because if inflation goes up then the interest rates will also go up, in which case they will be able to take benefit of higher interest rates,” said Rama Vasantharajan, head of fund services and fixed income research at rating agency Crisil.

“Investors can also consider balanced and equity diversified funds for higher returns than inflation,” she said. Even the conservative investors, who until now were looking to invest in debt instruments, should start looking for equity exposure.

Everyone should take a bit of risk exposure because even by not taking the risk exposure he is actually eroding his capital by investing fully into fixed income instruments, Bhatia said.

“It’s very tough to find out an instrument that provides safety and an upside over inflation figure. Because for that one needs 8-9 per cent post tax for which some exposure into risk is essential,” he said.

Only equity instruments seem to be outpacing inflation. Though investors should not look to go overboard on equity, a proper asset allocation with some part of the asset into equity funds will do god to your money.