Why it's time for a fixed deposit

The heady rise of the stock market over the last three years had made many of us forget all about fixed income investing.

Sure, bank fixed deposits, RBI bonds, post office schemes, fixed income mutual funds and other such savings instruments still exist. But few speak of them; even fewer recommend them.

Everyone wants to buy shares or invest in an equity fund. No one is interested in fixed return investments.

At Value Research, our mutual fund research outfit, debt funds make up 60% of the 855 funds we cover, but they account for an abysmal 8% of the pages viewed by visitors on our site.

The reason is obvious. Fixed income investments are perceived to earn tiny amounts of money compared to equity investments. While this is sort of true, it is unwise to form such impressions when the stock market is at a peak. It's easy to see that, in a year when the Sensex rises by 60% or 70%, the six to eight per cent earned by a fixed income instrument feels like a joke.

However, there have been plenty of times when the shoe has been on the other foot. For example, the five-year period from 1998 to 2002 saw the Sensex rise wildly and then fall to almost the same level. During these five years, being invested in the stock market would have seen your money stagnate. If, instead, you had invested in a fixed deposit where you were earning 11% or 12% interest on your deposit (which was the rate then), you would have seen your money go up by about 75%.

There's no guarantee that something like this won't happen again. In fact, right now, the stock market is in an uncertain phase and many problems are looming large. With the Middle East becoming even more unstable and oil prices rising (causing inflation), the interest rates are rising. This clearly indicates it is time to pay attention to fixed income assets

I'm not saying you must sell every stock and put all your money in fixed income options, but having a certain percentage of your investment allocated for fixed income options and, more importantly, maintaining that percentage is something every investor must do. Maintaining this percentage automatically means that when the stock component rises more than the fixed income part does, one should sell some stocks and invest that money in a fixed income scheme.

This is a great way of ensuring you keep selling and booking some profits and moving money into a lower risk investment.

Do note that not all fixed income investments are lower risk, at least in the short-term. Fixed-income mutual funds, in particular, those that invest in medium and long-term debt, exhibit decidedly unfixed returns. When interest rates rise, these funds perform poorly; when rates fall, they perform well.

I've oversimplified a little here, but the point is that for investors seeking lower risk, bank and government deposits and short-term mutual funds are the way to go.

Don't ignore this vital component of your portfolio just because it lacks the excitement of the stock markets.

The author is the CEO of Value Research, a mutual fund research organisation.