Debt is the safest form of investment short of securing your money as cash in an environment proof and heavily guarded fortress. The most secure form of debt instrument is in government backed instruments, such as treasury bonds in the US. However, the returns of such instruments is very low, and barely covers inflation in the US or in India. The minimum amount required to invest directly in such instruments is usually very high for an average retail investor, and so, most people invest in such instruments indirectly, through mutual funds.
Another similar debt investment is bank deposits, which provide similar yields. Such deposits are generally insured by the FDIC upto some limit in the US (usually 100000 USD), but arent generally insured in India. You can find options for bank deposits in the US at http://www.bankrate.com/brm/rate/deposits_home.asp and in India at http://www.ratekhoj.com/fixeddeposit/index.php . Note that the best NRI deposit rates in India are usually in the one year term.
Corporate deposits in India are riskier, but yield slightly higher returns. Again, speaking in general, the risk involved in corporate deposits is usually not worth the associate return potential. I would rather invest in equity if I want more returns, or in bank deposits if I want to minimize risk. Other instruments, such as income or debt based mutual funds are also available in both countries. The US also has exchange traded debt funds, such as BND.
Some guidelines for investing in debt instruments for a US NRI:
1. India provides better returns overall in debt instruments than the US – Indian returns are to the order of 9% per annum, which is much higher than the US returns (of 3.5%) at this time (Feb 2008).
2. Park US money in a money market fund in the US for the best returns: for instance, Fidelity municipal money market funds gave 1 year returns of 3.29% and lifetime annual returns of 3.76% (see http://content.members.fidelity.com/mfl/summary/0,,316048107,00.html ) – since this income is tax free, it beats most US bank deposits – which return about 3.5% (see http://www.bankrate.com/brm/rate/deposits_home.asp ). There are also savings deposits such as those from ING Direct and HSBC, but they also invite tax, and hence do not match the returns of the money market funds. They have an advantage of further liquidity, since money can be removed from it at any time, as opposed to a bank deposit, which has a term.
3. In India, divide the debt portion of your portfolio between NRI Fixed Deposits and fund based instruments - FMPs and quarterly debt interval funds.
a. NRI FDs yield much higher rates in non-repatriable FDs (NRO FDs) than repatriable FDs.
b. FMPs or Fixed Maturity Plans are like debt mutual funds, and they provide the benefit of not being taxable (if held for a minimum period of one year). However, FMPs have gone out of favor among asset management companies after the cost of starting an FMP was increased fourfold (see http://sify.com/finance/fullstory.php?id=14535046 ). A better choice today may be quarterly debt interval funds (QDEFs). Both FMPs and QDEFs have very low expenses as they invest in other debt instruments.
c. Quarterly debt interval funds are mutual funds that in general have a high exit load (i.e, the amount you have to pay if you withdraw), but every quarter, they give the choice to withdraw at no load. This provides a good degree of liquidity, and the benefits of mutual funds – no tax, etc.
The preferred mode for investing in India is in quarterly debt interval funds – though they are slightly riskier than bank NRI FDs (they do not guarantee a fixed return), they provide tax benefits, and also usually provide slightly better interest rates than a bank FD of the same term. In the US, park your debt portion of the portfolio in a money market fund, and maybe a portion in a high yield e-savings account for diversification. Another portion can be put into an inflation protection fund or ETF (such as TIP) which may protect against the event of hyperinflation in the case of a US recession.Disclaimer: I am not an expert or even a seasoned investor in the stock market – I am just an interested layman trying to apply some common sense to the market to sustain the value of my assets. Hence, none of this is intended to be investment advice and I do not take responsibility for any consequences that may arise by investing based on this post. Feel free to use or ignore any thoughts proposed here at your own discretion. Thanks.
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