Fixed Deposit rates in India rise: Why it's time to rebalance your Equity vs Debt investment portfolio

Fixed Deposit rates in India: With the equity markets scaling new highs almost every other day and interest rates on fixed income products rising, retail investors need to take a fresh look at their investment portfolio and check if it needs re-balancing. 

State Bank of India increased deposit rates by 30 basis points, just ahead of the rate hike by the Reserve Bank of India. Currently, the interest rate for a one-year FD from SBI is 6.7%. Rates on corporate FDs are 7% and above. Non-convertible debentures (NCDs) are offering 8-9%. If you had invested Rs 50,000 each in equity and debt a year ago, today, the equity investment would have risen to Rs 57,000 (assuming Nifty gained by 15%) and the debt portion would have risen to Rs 53,500 (assuming dynamic bonds that gained 7.5% in a year). 

According to experts this calls for a rebalancing of one’s portfolio. Ideally, one should shift 10-20% from equity to debt as equity at 28 PE is overheated and bound for a marginal correction. 

Allocate more to fixed income 
“Interest rates on FDs and NCDs have gone up, while Fixed Maturity Plans (FMPs) could also yield more under the rising interest rate scenario,” said Deepak Jasani, head - retail research, HDFC Securities. 

FMPs can offer returns in the range of 7.5-8%, depending on the credit quality of paper. If one invests a longer period, say three years, tax efficiency is also possible.

Investors in fixed income schemes should shift towards shorter maturity funds (such as credit funds), as they can benefit from the rising yield environment, said Aditya Makharia, head of research, Motilal Oswal Asset Management. Credit opportunity funds can offer returns in the range of 7.5-9%, depending upon the quality of portfolio. These funds rely on interest to generate their returns, investing in higher yielding, but lower rated corporate bonds. 

“Take a close look at tax-free bonds,” said Shankar Raman- CIO, third-party products, Centrum Wealth Management. Bonds of certain Non-banking Finance Companies are also worth a look if you have a low tax liability or no tax obligation. 

With two consecutive hikes in the repo rate, there is now increased expectation of increase in small savings returns. “Investors looking for risk-free, guaranteed returns may continue to invest in PPF, NSC, Sukanya Samriddhi, Post Office Savings etc,” said Adhil Shetty, CEO, BankBazaar.com. Rates of such instruments have not changed in the past quarter. 

Exit laggards in equity
“From the valuation perspective stock markets are highly valued,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services. Only some individual sectors and stocks may still be attractive, based on their prospects/valuation. “There is certainly scope for rebalancing of your investment portfolio. The laggards (scrips that are underperforming) can be exited currently, with money allocated to other asset classes like fixed income instruments.”Vijayakumar added.

But remember that portfolio rebalancing should be an on-going process. “Portfolio rebalancing and review should be an ongoing process irrespective of market movements,” pointed out Raman.