June-July 2013 would go down in the history of Indian financial services as a landmark period. The flight of capital from debt mutual funds on account of redemption by foreign institutional investors (FIIs) and the tightening of liquidity by the Reserve Bank of India (RBI) led to overnight wiping out of gains from debt mutual funds across various tenure.

This raises a question: Are debt funds also risky like equity? Are fixed deposits the only choice for non-volatile returns, especially for senior citizens and pensioners?

As in every investment decision, asset allocation is the key for return optimisation. When you, as a senior citizen, is making an investment, typically, you look for regular income, be it on a monthly or quarterly basis. A higher income is always welcome, but not at the cost of capital erosion. This is what you define and this is what is the anticipated outcome.

The first port of call should be the senior citizen savings scheme (SCSS) where you can invest R15 lakh (the maximum limit per investor) and expect a regular quarterly income @9.2% p.a. The next port of call will be the monthly income scheme (MIS) of post office, which generates a return of 8.4% pa, payable monthly. The maximum investment, jointly with your spouse, is R9 lakh and R4.5 lakh individually.

Do remember, the interest received from the above schemes are subject to tax. The total income you receive in a year from the investment of R24 lakh in the above schemes is around R2.13 lakh.

In the event your investing corpus is now exhausted, should you revisit the investing strategy for generating non-volatile regular cash flow? The answer to this depends on your risk appetite, minimum cash flow required and the investing time period for alternate investments. Now that you know what is the income you can get in these schemes with certainty and that too at regular intervals, you need to consider the asset allocation for the remaining corpus, if any.

The negative returns in debt mutual funds in the last two months have generated anxiety among investors, and more so among senior citizens.

This phenomenon of returns being eroded overnight is usually associated with the equity asset class. The same phenomenon being witnessed in the so-called safer asset class ? debt mutual funds ? is new.

Does this mean that you shun it. This is the easiest and simplest move. But this move could have long-term negative repercussions. Now is the time to revisit your debt portfolio. So, if you need to optimise your return, you need to understand the working of the various types of debt mutual funds.

A bank or a corporate fixed deposit works on the premise of guaranteeing up front a certain fixed rate of return, irrespective of the movement in interest rates, credit risk, etc. This gives a certainty to investors seeking defined return and cash flow.

Debt mutual funds are of various types ? accrual or duration, short term, gilt funds, etc. This can be confusing and overwhelming to a majority of investors. So, what is the way out. Get to know the type of funds and why you need to invest in them. If you need to invest without the concern of volatility, an accrual kind of a debt fund can be considered.

So, it depends on what you are looking at and what you are comfortable with.

Debt mutual funds come with their own risk. To manage the risk and not to ignore the risk is the key. Having a mixture of defined fixed income funds, as in SCSS and postal MIS, along with the debt mutual funds, not to forget an allocation to equity, based on your time horizon and return expectation, is the key.

The writer is founder and managing partner of Zeus WealthWays LLP