Friday, 16 December, 2011

Thoughts on Fixed Income Scenario

Thoughts on Fixed Income Scenario

All of us are familiar with the old adage about bankers offering umbrellas in summer and seeking a return of those umbrellas the moment it starts raining.

I just observed that a lot of banks have started advertising "Long-term Fixed Rate Home Loans". The latest one is from HSBC. When bankers want you to borrow money from them at a fixed rate, that too for a long duration of time, you can be fairly certain that:

  • Bankers expect that the rates are unlikely to go up much in the near and medium term
  • Bankers expect that the rates are actually likely to go down in the coming quarters

Combine the above two points, and a couple of simple strategies emerge for the retail folks:

  • If you are looking at taking a loan to buy a home or a car, go in for a floating rate product. Avoid the temptation to go in for a fixed-rate loan
  • If you have surplus cash that you wish to invest in debt products (like fixed deposits in banks, for instance), the time to act is now. Ideally, lock in your money in a good public sector bank with a long-term fixed deposit for a few years. Chances are bright that a few months later, a 3-5 year FD will fetch much lower returns than what they do right now.



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