“For example, the number of US interest rate hikes expected in 2019 is almost nil when compared to three hikes predicted some months back. These types of changes can result in capital fluctuations.”

How to maximise bond returns

As for returns, the investor can stretch the bond interest rate with leverage. Leverage refers to an investment strategy of using borrowed money — specifically, the use of various financial instruments or borrowed capital — to increase the potential return of an investment.

When one refers to a company, property or investments that are ‘highly leveraged’ it means that the item has more debt than equity. So, there is a lot of risk here if the company you’re buying the bond from performs poorly. The bond purchaser is even at risk of losing his capital investment. However, the return can be as high as seven to eight per cent annually with a good amount of leverage, but analysts are not recommending this in the current market scenario.

“In 2009, we had the global recession and fixed deposit interest rates went high during this period. The government wanted to attract liquidity and they increased the interest rates. They wanted to bring in that liquidity. Currently, because of the US turmoil, we are looking at a rate of 3.5 per cent interest,” said Arun.

Pros and cons of fixed deposits

Fixed deposits also have advantages and disadvantages, and savers can reap high returns or less, depending on market conditions and the currency of choice.

Investors taking this route can choose to park their money in different currencies, and if you choose the rupee option, the returns can be high, say, seven to eight per cent.

However, a fixed deposit in rupee can lose a lot of value if the Asian currency nosedives against the greenback. Conversely, a US dollar-pegged account can yield substantial rewards if the greenback strengthens.

“Leveraged FCNR products linked to the Indian rupee have lost a lot of money for non-resident Indians as the rupee depreciated almost 13 per centage in the last one year,” said Mamtani.

But there’s one thing to be confident about and that is Indian banks are looking strong and are unlikely to go bust, as there are strong regulations governing these banks.

“Indian banks are regulated by the government. A local Indian bank may face crisis but it is unlikely to go bust. For example, Yes Bank is facing a crisis. ICICI also faced a crisis end of 2008, but the Indian government pumped money into these banks and revived them. Indian banks are also internally insured so parking your money in fixed deposits with them is a good option.”

So, if you want to invest in rupees back home, local fixed deposits yield a good return. However, if you intend to use the money elsewhere or take it back to Dubai at some point, fixed deposits can be the best bet.

“The FNCR fixed deposit product works well for clients and banks, as long as the underlying rupee remains strong against the dollar. But, as the currency depreciates, the total value of investment also declines directly, impacting the share of investor’s equity,” said Mamtani.

Other options for bonds

PSU bonds, which are sold on private placement basis, are generally considered to be less risky while private bonds have a wide spectrum of risks associated with them, depending upon the credit rating of the issuing company.

Non-convertible debentures are secured debt and are issued by corporations with the backing of their assets.

Perpetual bonds work like lifetime irredeemable fixed deposits. Investors will receive a fixed interest on these bonds every year, but don’t have an option to redeem their principal. Perpetual bonds are issued by banks under tier-one capital.

As an NRI, you can consider all of the above options in your investment plan. Just like government securities, you need to have the requisite money in your NRI account and your bank will execute the purchase or sell instruction on your behalf.

Investors are also advised not to put their eggs in one basket. They can opt for both fixed deposit and bonds, with more allocation towards the high-yielding options.

“Given the carried characteristics of these products, it is clear that investors who prefer liquidity should allocate a major part of their portfolio for bonds, while others should go for more of fixed deposits, said Mamtani.

Fixed deposits should ideally be held for a minimum period of two years to maximize returns, and if it has a rupee component, “investors should hedge their currency exposure.”