With interest rates headed southwards, the time has come for the ultra-risk averse investors who preferred investing only in fixed income products so far to diversify their portfolios if they wish to maintain the same levels of income from their investments.
Interest rates have fallen from 9.3% to 8.7% and are expected to fall further. "Interest rates will fall gradually and we could touch a low of 6% over the next two to three years,'' says Yogita Dand, certified financial planner (CFP).
It's not all bad news as the lower interest rates should also bring down inflation from the current 7% levels to a low of around 5%. "The real returns will be the same. The actual cash in hand would be lower which will prove worrisome for those who are used to earning a certain fixed amount of money,'' says Dand.
"The fall in interest rates could shave off upto 10-15% of the income,'' said sources. Senior citizens are likely to be most affected, especially if they have no other source of income.
Investors now need to adopt strategies that will help them to mitigate the effects of lower interest rates. "One of the solutions is to choose to invest in longer duration investments like long-term bonds, etc. The fall in yields are compensated by the gain in portfolio value,'' says R Sivakumar – head - fixed income, Axis MF.
It is more necessary now than ever before that the ultra-risk averse investor now actually diversifies the investment portfolio so as to maintain the current income levels and to avoid capital erosion. "It is essential for the ultra-risk averse investors to diversify their portfolio," says Dhawal Dalal, head – fixed income, DSP BlackRock Investment Manager.
"We would suggest that certain amounts be allocated into risky assets like equities. It is not a case of one size fits all, but only for those with the risk taking ability," points out Dalal.
"The idea is that with the steps taken in the Budget and the rate cuts will lead to a positive economic growth that will be positive for equities which will help to compensate for the decline in interest income," explains Dalal.
However, Vidya Bala, head of mutual funds research, FundsIndia, is not in favour of an equity exposure for senior citizens who usually are ultra-risk averse and prefer to invest only in fixed income products. "If one is in the early 50's, then they can invest in equities. But for those who are in their 60's, it is not advisable as they may end up losing capital in the initial one or two years," she says.
