Your Queries – Mutual Funds: Funds with high exposure to G-secs more suitable now

For those investing for a long horizon, follow a core and satellite approach for the fixed-income portion of the portfolio.

Chidambaram recently wrote that the total outgo on free food grain, cash allowances to women, PM-Kisan and other cash transfers is “no more than Rs 2.25 trillion — which is less than the annual fuel taxes collected by the Centre alone.”

What is the ideal approach to debt fund investing now?
—Anoop Golani

Long-duration funds present an elevated risk during the up-turn in the interest rate cycle. Hence, exposure to such funds in the portfolio should be restricted. Consider target maturity funds having a maturity date close to their investment horizon. These entail minimal interest rate risk if held to maturity and also have a low expense. Corporate bond spreads are currently narrow compared to their long-term averages (particularly for the AAA-rated segment); so subsequent widening of spreads could present additional downside risk to investors. Hence, funds with high exposure to G-Secs look more suitable than corporate bond funds at this juncture. For those investing for a long horizon, follow a core and satellite approach for the fixed-income portion of the portfolio. The core allocation (~50-60%) should be invested in shorter duration high credit quality accrual funds (low duration, short-duration, floating-rate and medium duration funds), some allocation (~20-30%) to longer duration funds such as Medium-to-long term and Dynamic Bond Funds and the rest (~10-15%) into money-market funds (liquid, ultra-short) to your near term cash flow needs.

How should we invest in international funds to get some diversification?
—Ankur Bhatia

To avoid the possibility of a breach of the industry-wide limit of $7 billion laid down by RBI, the SEBI in late January 2022 directed mutual funds to stop accepting subscriptions in schemes that have a mandate to invest in overseas securities without any option to invest in Indian securities. However, fund of funds (FoFs) investing in the exchange-traded funds (ETFs) abroad are still open for investments, since for investments in overseas ETFs, there is a separate industry-wide investment limit of $1 billion. Investors can also take exposure to international equities via ETFs in the secondary market. However, be cautious of the mispricing of the ETFs since the ETF prices are currently trading at a premium to their NAV. Liquidity on the exchange platform may be limited which could also impact the execution price adversely for investors.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India).
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