As interest rates start coming down, income and gilt funds will start doing well, says Jiju Vidyadharan, Director — Funds and Fixed Income, Crisil Research. In an interview to Business Line he discussed the performance of debt mutual funds and what investors should look for while investing in them.
Excerpts from the interview:
How have debt funds been performing in the current scenario?
In the current scenario, long-term funds have been doing well.
Gilt funds have been doing well largely on account of the fact that interest rates have been coming down.
The longer tenor funds have also been clearly doing well.
In case of asset flow, per se, there is some interest on the long-term debt funds side, which also includes fixed maturity plans (FMPs).
There is also some money flowing into liquid funds as of now.
FMPs are losing their attraction at this point as interest rates are coming down and FDs are giving better returns. So why should investors look at FMPs now?
Investment in FMPs has to be viewed on a post-tax basis. If you were to really look at locking in at this point of time, then FMPs would still, on a post-tax basis, give you better yields. Of course, as interest rates decline going forward, longer duration products will come into play.
This is because returns have an inversely proportional relationship with yield movement.
You would see income and gilt funds doing better. It has already started. While interest rates are still relatively high, you will still see some interest in FMPs.
So you would still recommend FMPs at this point?
It depends on the investment appetite of the investor. For instance, you have FMPs which are suited for people who have a longish investment horizon (of a year) so that they can capitalise on the benefits of capital gains tax as well. So, from that perspective, yes, FMPs are products which would suit an investor with a longer investment horizon.
Whereas, if you are looking at short-term, there are liquid or liquid plus or ultra short-term funds which would be better. Instead of keeping your money idle in savings deposits, you can earn a relatively higher yield by putting them in a liquid-plus or ultra short-term fund because of the tax benefit and the incremental returns that the product category gives you.
How much should retail investors put in debt as a percentage of their entire portfolio for different risk profiles?
Everyone goes by thumb rule. For a conservative investor it would be 10-20 per cent in equity and remaining in safer assets. Again within that how much needs to be allocated depends on the interest rate environment. So, for instance, if interest rates are declining, then the risk of mark-to-market loss is lower.
Whereas, if you look at a scenario where it is rising, then there is a potential mark-to-market loss that comes in and, therefore, people would invest in safer categories such as liquid and ultra-short. So it varies.