‘Gentlemen prefer bonds.’ – Andrew Mellon
With Equity Markets reaching all time high levels and experts calling it as a multi-year bull run for Indian Market, many Investors joined the market rally. However, suddenly, the tide has changed and markets have tanked substantially in the past few days. Portfolios have turned upside down. Investors went into a panic mania and lost big time. Had they opted for a diversified portfolio, they would have avoided the losses to some extent. For an ideal diversified portfolio, one should diversify his or her investment in different asset classes to minimize the risk of concentrated portfolio. Asset allocation is the key to successful investment.
Debt mutual fund is one such asset class which gives the portfolio of an investor the much needed balance and helps him in lowering the down side risk and steady returns. Debt funds are mutual funds that invest in fixed income securities like bonds, debentures and treasury bills. Despite the new income tax laws which made debt mutual funds less appealing, there are several reasons which prove that this asset class needs to be part of the portfolio of every investor. The key risk associated with debt funds is interest rate risk which has reduced considerably because of sharp fall in crude oil prices. For last 3-4 years, RBI has adopted a tighter policy which kept Interest rates high, but now with Inflation well under control and reduced Current Account Deficit (CAD), RBI may reduce key policy rates to boost growth in economy and thereby debt mutual funds can benefit from falling interest rates. Equity market has fared well and it is easier to find capital by other means for corporate and thereby reduced leverage will help in reduce credit risk in debt funds. And due to changes in taxation of debt funds, liquidity risk is also limited. Overall there is a possibility of equity and debt to even converge over the next 6 to 12 months and increasing the exposure of debt funds would be prudent. Investors with 2 year plus view can go for income fund to reap the benefits of falling yield curve.
One can also look for dynamic funds as the fund managers will have flexibility in investing in different maturities. Ultra Short Term funds are suitable for investors with investment horizon of 3 to 15 months. However, investors who require money on a short notice or want to park their saving for contingency purpose can use liquid funds, funds with lowest risk. A holistic approach towards the investment and more importantly financial goal would help individual in the long term. In the current scenario, debt funds have the potential to deliver better post tax returns. It is suggested to give more importance to your financial goals before considering the tax incidences, when investing in a debt fund
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Thanks & Regards
Raj
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