Lock into debt while the going is good :: Business Line

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Cast-iron investments, or those that carry tax breaks, don't often earn you a good return. Yet, the repeated interest rate increases of 2011 have handed investors the golden opportunity of safe debt options paying double-digit interest. You should capitalise on this to park a core portion of your savings as well as emergency money in deposits and bonds.

First, consider bank deposits.

With investments up to Rs 1 lakh covered by deposit insurance, they are an ultra-safe investment to park your money. Deposits with select banks today offer a 10 per cent interest rate for 2-3-year time frames, these rates are at a multi-year high. Diversify across two-three banks to ensure higher protection for your deposits.

Lock into these rates while the going is good. With the RBI already indicating that it isn't going to keep raising interest rates and may even cut them in 2012, banks may begin to trim their rates in 2012. The last time the interest rate cycle peaked out in end-2008, interest rates on bank deposit rates fell to an abyss of 7.25 per cent in fifteen months.

Second, maximise your contribution to small savings schemes such as the Public Provident Fund, which now offers a tax-free yield of 8.6 per cent a year. With interest rates on small savings schemes beginning to float with market rates from 2011, these could also moderate next year.

Third, stock up on long term tax-free bonds. For investors in the top income bracket, the 30 per cent tax on interest from debt instruments often results in measly debt returns that don't even match inflation. But recent increases in interest rates have sweetened the deal.

Recent bond offers such as the currently open NHAI tax-free bonds (interest at 8.2/8.3 per cent a year) are good one-off opportunities to lock into inflation-matching interest rates. Once you buy them, you can trim the debt in your diet in 2012 or the subsequent years.

Lastly, if you invested in debt through mutual funds, it is time to shift out of short-term funds and fixed maturity plans to dynamic bond funds and income funds. While the former benefit from rising rates, the latter can make capital gains from falling interest rates.