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Interest rates have reached their peak levels and expectations are the Reserve Bank of India (RBI) will go for some monetary softening, going forward. Investments in debt based instruments seem quite attractive from many perspectives such as capital preservation and risk returns ratio. Capital appreciation is intact even if interest rates go down in the future.

   Investors with a low risk appetite can reduce exposure to equity and rebalance the portfolio by investing in debt based instruments.

   Here are some options in bonds:

Debt funds    

These instruments are good options for investors with a low risk appetite. These funds invest in debt based instruments and government bonds.

   Therefore provide safety of principal with decent returns. These funds come without any lock-in such as bank fixed deposits. They offer quick liquidation and hence come in handy for those wanting to invest with a short to mediumterm perspective without any investment risk.

   Since interest rates are up, debt-based instruments are attractive from many perspectives such as capital preservation, low risk, high returns and the possibility of capital appreciation if the interest rates go down in future.

Liquid funds    

Liquid funds are good for investors who want to park their funds for a short term. These funds invest the corpus mainly in money market instruments, short-term corporate deposits and treasury. Liquid funds can be liquidated on a very short notice. Therefore, they score over other short-term deposits.

 
   Returns from bank fixed deposits are taxable depending on the tax bracket of the investor, which pulls down the actual returns considerably. Dividends from liquid funds are tax-free in the hands of the investor. This increases their effective returns.

Tax-saving bonds    

There are various bonds available in the market that qualifies for income tax rebate. These tax-saving bonds come with a lock-in period of five years or more. The returns from these bonds, including the income tax savings, are attractive for investors in higher income tax brackets.