Is this a good time to buy debt mutual funds? Find out

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Published: February 9, 2017 10:38:05 AM

An ideal investment portfolio is targeted to meet every financial goal of an investor, and it needs to be reallocated every now and then to make the most out of market movements. Each investment instrument held in a portfolio should have a definite purpose towards achieving a financial goal.

Debt investments in your portfolio minimize risk, beating down the volatility one is subjected to from investment in equity market, and fetch assured returns over a long tenure.Debt investments in your portfolio minimize risk, beating down the volatility one is subjected to from investment in equity market, and fetch assured returns over a long tenure.

An ideal investment portfolio is targeted to meet every financial goal of an investor, and it needs to be reallocated every now and then to make the most out of market movements. Each investment instrument held in a portfolio should have a definite purpose towards achieving a financial goal.

Debt investments in your portfolio minimize risk, beating down the volatility one is subjected to from investment in equity market, and fetch assured returns over a long tenure. Debt investing works like a cushion when the interest rates are falling. However, investing in the right time and for the right duration is important to optimise the benefits of any investment instrument.

When to invest in debt investment products
The thumb rule is to stay invested or put surplus money in debt investment instruments such as bank FDs, bonds, corporate deposits (CD), PPF when the interest rates are expected to fall. The return on debt instruments depend on the risk and tenure associated with them. For example, a government bond would give you lower return in comparison to corporate bonds as they are relatively less risky.

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Debt investments typically fetch returns higher than the prevailing inflation rate. If you want steady returns over a long tenure, debt instruments are ideal. Even short-term debt instruments can be an effective source of earning income on idle money. When uncertainty prevails in the market you can stay invested in debt instruments to earn conservative returns.

Apart from specific debt instruments, you have the choice to put your money in a debt mutual funds.

Long-term capital gains on debt investments (if held for more than three years) are faced with a tax of 10% without indexation benefits and 20% with indexation benefits. For short term capital gains, taxes are charged as per slab rate.

Why the current scenario is attractive for debt mutual fund investors
The interest rate has already fallen significantly in the last two years and now with the demonetized currencies flowing back in the banks, the interest rates are likely to come down further. Returns on fixed deposits are low at the moment. Therefore, it’s time to take out money from the banks and invest in the debt fund market.

Interest rates have an inverse relation with bond prices. Debt mutual funds invest heavily in government and corporate bonds. When interest rates fall, the prices of bonds increase. Therefore returns from debt funds increase when interest rates fall.

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These above-average returns are visible in the CRISIL AMFI Debt Fund Performance Index, according to which the debt mutual fund category as a whole has returned 9.73% for the year, and 10.21% for three years, ending September 2016. This has been a period when interest rates have been trending downwards.

Therefore it may be a good idea to pull out of other safe havens such as gold or fixed deposits which have been slacking or earning lower interest income, and park some money in debt mutual funds which are performing impressively lately.

Investing in a debt mutual fund
Debt mutual funds ensure better returns compared to small saving schemes such as PPF. Managed by skilled asset managers, mutual funds reduce risk by investing in government bonds and corporate deposits with a high credit ratings.

Within debt funds, you have options such as long-term funds, short-term funds, liquid funds, credit opportunity funds, and so on. Debt mutual funds also allow you to invest through systematic investment plan (SIP).

Which is the appropriate debt fund for you?
Investments should help you meet specific goals. It is with this thinking that you should pick your mutual funds.

If you have high liquidity and want to park that money temporarily in a safe instrument with assured returns, you can try liquid mutual funds. It would allow you to enter and exit the investment anytime you want on a trading day without any exit load. The return from a good liquid fund is usually a few points above the prevailing returns from fixed deposits.

If you want to invest for a longer period, you can look at long-term funds, which can fetch you higher returns than FDs.

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Investing through mutual funds allow you to get access to a wider variety of debt asset class that have a high-entry ticket size. In mutual funds, you have the option to switch your investment quickly, but if you take a direct exposure in debt asset, you cannot move your fund easily.

(The writer is CEO, www.bankbazaar.com)

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