Is this the best time to invest in debts?

Once a friend of mine came to me and asked is it safe to put money in RBI Bonds? I did not know what to say, was he ignorant or was he pulling my leg. With so many scams around, people have just lost trust, especially in corporate bonds. The debt market was very good till now, with interest rates going up. It looks like the rates would start going down and this would be the best time to lock your money for a fixed rate of interest. It would be better to lock the interest rate for a longer period.

Now the question comes, how much should go into short term and how much into long term. This depends on an individual’s goals. Next question that would come up is where to invest. Should one go for corporate bonds or for government securities? Corporate bonds are issued by companies and government bonds as the name suggests by the government. So which are safe, definitely Government bonds. Corporate bonds carry a higher risk and that is the reason corporate give higher rates of interest. Higher the risk of not getting your money back, higher the interest rate.

Since Government bonds are secure, the rate of interest is a bit lower, but note the rate given by the government is usually taken as a benchmark. Government is borrowing heavily, this has happened, because of the fall in stock markets. Stock Markets? Yes, the stock market, since the government had planned some disinvestment, but did not do so, since it would have got the minimum base price. So what is the other way to get money to meet all its plans? Borrow, yes borrow, through bonds.

The coming budget will give us an idea how the bond rates would go. The reason is if the interest rates just keep going up, inflation will go up. So the government would plan to generate income through some other way. If it does happen, the interest rates would fall. But with high inflation and poor market conditions, businesses have also seen a slow down, they had issued corporate bonds, to ensure they would be able to complete the projects they had started. Their money is locked in inventories, because of low off take.

Hopefully as markets start recovering and inflation would come down, the business risks would be lower, leading to reduction of interest rates. So as we see, interest rates would go down, one way or the other. So what should you do? The best thing would be go for corporate bonds for the short term and Government bonds for the long term. In case you are not sure what to do, invest in Debt Mutual funds. These mutual funds would take care of assessing the risks. Yes, if you do the investment on your own, the yields would be better.