One needs to choose the right product to invest into based on the liquidity needs.
People invest in debt instruments to get stable returns. But all debt instruments do not offer stable returns. Some debt instruments like Debt funds are volatile due to interest rate cycle and other reasons. But, debt funds cannot be avoided as they have their advantages. We need to pick and choose the fund subcategories that would work well now.
Interest rate movement affects debt instruments. However, predicting interest rate movement, especially over the long term is difficult. The current scenario signals an upward trajectory. A hike in the interest rate will have an impact on one’s current Debt Mutual Portfolio in the Short to Medium term.
The following are some of the factors that may impact debt products -
For this, one may choose funds with shorter tenure portfolios, good asset quality with accrual strategy of investment in the fund. Such funds would be affected the least in an interest rate upcycle. Also, one may avoid Govt securities as much as possible as they are extremely sensitive to interest rate movements, especially the ones with a longer duration.
The other option available in Debt MF space is Fixed Maturity Plans ( FMPs ).
A good alternative to Open Ended Debt Mutual Fund Schemes -
Fixed income investors with low to moderate risk profile may, therefore, take some exposure in Fixed Maturity Plans (FMPs). FMPs are close-ended debt mutual funds with a maturity period which could range from one month to five years. These funds usually invest their corpus in highly-rated securities, AAA corporate bonds, certificates of deposits (CDs), commercial papers (CPs), and the like. There are those which may invest in lower quality papers too and may give higher returns. But as a general rule, one may consider high quality portfolios to ensure safety of investments and interest payments.
Advantages of investing in an FMP -
FMPs are available at the moment and the returns offered by the papers that they would be putting money into indicates that they may be able to offer 8.1-8.4% or thereabouts pretax, and is likely to offer about 7.4-7.5% after LTCG tax ( depends on the inflation position in the next three years ) . FMPs are best suited for those who do not want regular cashflows & liquidity in between.
B. Other options before you -
The above three options may be considered if regular income is needed. These are the other options available, apart from bank FDs. The first two will offer only annual income and the third would offer monthly/ quarterly payments.One needs to choose the right product to invest into based on the liquidity needs, risk they are willing to take, taxation, income needs etc. A good portfolio would have the right mix of these funds so that it is most suited to one’s needs.
Suresh Sadagopan is a Certified Financial Planner and runs Ladder7 Financial Advisories, a fee-only financial planning firm.
First Published: IST