What should be your fixed income investment strategy?

The other option available in Debt MF space is Fixed Maturity Plans ( FMPs ).

Fixed income investors with low to moderate risk profile may, therefore, take some exposure in Fixed Maturity Plans (FMPs). FMPs are close-ended debt mutual funds with a maturity period which could range from one month to five years. These funds usually invest their corpus in highly-rated securities, AAA corporate bonds, certificates of deposits (CDs), commercial papers (CPs), and the like. There are those which may invest in lower quality papers too and may give higher returns. But as a general rule, one may consider high quality portfolios to ensure safety of investments and interest payments.

Indexation benefit on capital gains, if investment tenure is more than 3 years. Most FMPs are over 3 years tenure.

 Lower expense ratio.

 Many FMPs invest in highly rated bonds/ papers and hence credit risk is likely to be low.

Closed Ended Fund - The intervening interest rate volatility may not affect returns profile of the scheme. Scheme is cumulative and returns come at the end.

Units will be listed on Stock exchanges and provides an exit option. But then, liquidity is low & hence one should invest here with the idea of holding it to maturity.

FMPs are available at the moment and the returns offered by the papers that they would be putting money into indicates that they may be able to offer 8.1-8.4% or thereabouts pretax, and is likely to offer about 7.4-7.5% after LTCG tax ( depends on the inflation position in the next three years ) . FMPs are best suited for those who do not want regular cashflows & liquidity in between.

Tax free bonds from secondary markets - offering about 6.3% tax free

Perpetual bonds from secondary markets - offering pretax returns of about 8.8%-9% now ( for higher quality bonds )

Corporate FDs ( High Credit quality ) - offering pretax returns of 8.3-8.5% now.

The above three options may be considered if regular income is needed. These are the other options available, apart from bank FDs. The first two will offer only annual income and the third would offer monthly/ quarterly payments.One needs to choose the right product to invest into based on the liquidity needs, risk they are willing to take, taxation, income needs etc. A good portfolio would have the right mix of these funds so that it is most suited to one’s needs.