Debt funds can offer better return
Written on Saturday, November 14, 2015
By Kumar Pushpraj
Debt funds are schemes investing largely in range of debt and fixed-income securities of different maturities and credit quality. Investment gurus have always recommended inclusion of fixed income products in your portfolio. This recommendation is basically to cushion your equity portfolio with debt funds, so that when equity market is volatile, your debt portion will continue to offer you a decent return. However, that doesn’t mean you should not be investing in equity funds.
You would find a lot of comparisons being laid out whether you should invest in debt funds or go for equity as a favorable option. But trust me there is never a debt v/s equity thing, if I have to answer it, I would say invest in both. Volatile market is always a matter of concern for retail investors but if you have a balanced portfolio with the right mix of equity and debt, you have not much to worry.
Recommended debt investments
Fixed Maturity Plans (FMPs): These are closed ended debt schemes with a fixed maturity date and they invest in debt & money market instruments maturing on or before the date of the maturity of the scheme. These securities are redeemed at the end of the FMP term. While such plans offer several advantages, the tax benefits stand out. Irrespective of the holding period, FMPs generate better post-tax yield.
Though the FMPs are relatively less risky, investors should not treat these as dream products that offer high return with zero risk. While the structure eliminates interest rate and reinvestment risk, the credit risk (or the default risk) still exists.
Monthly Income Plans (MIPs): They are mutual fund schemes investing a major portion in debt instruments. MIPs provide monthly income to investors, but the periodicity depends upon the option you choose, which may be monthly, quarterly, half yearly or annual. As a balanced investment avenue they invest a minor portion of their portfolio (around 15-25%) in equities and rest in debt and money market instruments.
In terms of risk-return profile, MIPs fit-in nicely between a bond fund and a balanced fund. MIPs have the advantage of choosing among sovereign, corporate and money market instruments, while the flexibility to invest a minor portion of the portfolio in equity provides a booster to the portfolio returns. On the taxation front they are treated as debt funds.
Ultra Short Term Funds: Ultra short-term mutual fund schemes are designed to offer investors an opportunity to earn returns by investing in money market securities. These investments are either made on an overnight basis, ten days or a month. There is a huge organized market of lenders where money is borrowed and lent for periods as short as one day, 14 days, 30 days and 3 months. These funds are commonly categorized as liquid funds, cash management funds and treasury funds. Investment in such markets can be preferred as they have a low risk profile and offer high liquidity to investors. Liquid Plus funds have no entry and exit loads in most cases.
Capital Protection Oriented Funds (CPOF): These funds prove to be beneficial for the category of investors who are not comfortable with taking interest rate risk and market volatility. While this fund class is ideal for preserving capital during a downturn but it does not help much in creating wealth for investors. Capital-protection-oriented MF allows risk-averse investors to gain some exposure to equity market. In few developed countries, investment in CPOF come loaded with capital guarantee by means of some positive participation. But in India, these funds are closed-ended and they offer capital protection, without a guarantee.
Any usual CPOF will park a small proportion of the pool in equities, while a major portion (say about 80%) will be invested in debt and money-market instruments. By allotting a portion to equities, the fund tends to participate in the upside during growth time and offers downside defense in a bearish market. These funds do not vary much in structure. Debt part will be kept up with commercial papers and non-convertible debentures offering good yield.
#Mutual Fund investments are subject to market risk. Read scheme related documents carefully before investing.