The fixed-income market is in a sweet spot, said Prableen Bajpai, Founder, FinFix, recommending that investors take advantage of the high yields and tax benefits of debt mutual funds to maximise their returns. However, she added that while debt yields might look attractive, any and all asset allocation should be planned entirely on an individual basis, based on an investor’s goal and time-frame.
Is debt looking attractive currently and which debt instrument would you recommend?
Moving your money to fixed-income assets or debt depends entirely on your goals. The oft-mentioned matrix of deciding your asset allocation as per your age doesn’t really work. Your portfolio division should depend on your goals and time horizon, it should be set up accordingly.
Broadly, debt funds have an advantage over any other fixed income products available. Given the current yields, debt mutual funds ranging from one year to ten years look attractive, since there is relative certainty of returns as well. Additionally, given that the financial year is coming to an end, the indexation benefit must also be accounted for (for an additional year). Therefore, for those in a higher tax-slab, for fixed income assets, debt mutual funds are recommended.
What are the advantages of a debt mutual fund and how to select the right one?
With FDs, tax must be paid yearly on interest accrued. With debt funds, there are fewer tax complications once the funds have been parked, it must be dealt with on withdrawal or maturity. Additionally, with indexation, investors will be able to further protect their gains against excess taxation. Furthermore, those who have money in a debt fund will also ideally have some exposure to equities, and given the current market scenario, gains from debt funds can be set off against losses from equities or equity mutual funds.
Right now, expense ratios for target maturity funds are lower since they’re quickly gaining popularity, so it’s a good space to invest. Also, not enough people take advantage of the SIP option for debt mutual funds, more people should exercise this option. To find the right fund, it is important to check the post-tax, post-expense yield, the credit quality of the fund, the AUM of debt funds and to see if the fund house or manager successfully navigated crises in the past.
What is the best time to invest in debt?
Since the financial year is almost coming to a close, it would be prudent to invest now and take advantage of indexation benefits for another year. The debt market is currently in a very sweet spot with reasonably attractive yields and the end of the fiscal year. It’s always difficult to predict the peak of the market, but it’s relatively close right now. The RBI
Should investors move money from equity to debt?
When I say park funds in debt, I’m talking about money that is just sitting idle or in an FD, not for money meant for equities. Equities are in a very boring phase at present; the time correction is the hardest phase to go through. However, even though this phase tests investors’ patience and conviction, it is important to continue SIPs and accumulate equities, for when this range is broken, your portfolio might soar.