The secular trend of interest rates going down in the long term all across the world, combined with an ongoing volatility in the equity markets, has left investors confused about the right investment options. The situation is much more uncertain for the long-term investors with an investment horizon of 20-30 years. Considering the RBI and Finance Ministry having agreed upon the interest rate targeting mechanism, investors should be prepared for interest rates going down in medium to long term, said financial planner Amol Joshi.
“If you have a 20-30 years kind of horizon, and you need some kind of tax efficiency that is where debt mutual funds come into the play,” he added.
What are debt mutual funds?
Debt mutual funds are the funds which mainly invest in a mix of debt or fixed income securities such as treasury bills, government securities, corporate bonds, money market instruments and other debt securities of different time horizons. The debt securities in general have a fixed maturity date & pay a fixed rate of interest. Currently, 25-30 years G-Secs have a yield of about 8 percent.
Watch video: How debt mutual funds offer good investment options to long-term investors
Why debt mutual fund and not bank FDs?
The bank FD interest is taxable at bracket rate and also its effective yield falls after deducting tax. So, debt mutual funds are much better option in comparison to FDs. In addition, debt mutual funds are adjusted for inflation before calculating tax. The debt fund have an inherent ability to serve long term goals of 25-30 years and offer highest returns during the period.
“Reliance Nivesh Lakshya Fund is a new fund offer. This fund is going to invest in government securities, one of the safest debt papers you can think of, safest in terms of credit risk. It’s a sovereign guarantee and it’s as safe as you can get in mutual fund construct,” he said.
This fund will invest in government securities with 25-30 years of maturity. Reliance Nivesh Lakshya Fund satisfies both requirement as it invests for extremely long period of time (20-30 years) and gives slightly higher rate of interest than that prevailing in bank FDs, he added.
Those planning a gift or legacy for their grandchildren or looking to finance child education twenty years from now, this fund offers a good option, he also said.
This interview was originally published on 23 June 2018 on www.financialexpress.com