Unpopular Opinion!

Debt Mutual Funds or FD?

What are the risks to look for while investing in a Fixed Income?

(a) Credit / Default Risk – Principal or interest not paid

(b) Interest Rate Risk – Rates going up after you invest & you making lower returns

(c) Inflation Risk – Post tax not able to generate inflation beating returns

(d) Liquidity Risk – Not able to liquidate at market price without any penalty

When someone is investing in a Fixed Income product, what’s her requirement?

(a) Conservative Investor will look for,

–       Fixed / Regular return

–       Safety

(b) Accredited Investor will look for,

–       Higher Returns

–       Liquidity

What should a conservative investor do? 

(a) Mutual Funds have lost the indexation (tax) advantage & are now taxed like an FD. Most Debt Mutual Funds except for target maturity funds, can’t give you clarity around the returns you can expect.

(b) Today the average return (YTM) at which the Target Maturity Funds are trading at is 7.5% vs which 3 years FD at a Small Finance Banks paying 8.5 – 9%.

(c) If you are looking for a FIXED RETURN solution, small finance banks are offering better options, risk free up to 5L of investments & you may use this option once your threshold in Govt. backed schemes is crossed.

 What should a sophisticated investor do?

(a) Mutual Funds generate returns in 2 ways-

– Interest payment from the bonds they have invested in.

– Capital Gains. Debt Mutual Funds generate capital gains when interest rates fall in the market because they are holding bonds with higher interest rates & when interest rates fall in the market, the value of the bonds they hold go up & hence they generate capital gains

(b) So, if you can time the interest rate fall, you can generate higher returns than an FD. Like say the current time is perfect for Debt MFs, In the next 18-20 months, RBI will start cutting the Interest rates and MFs will be able to generate Capital Gains. Apart from this the Yield to Maturity of Debt Funds with Medium duration is between 7.5 to 8%.

(c) Over & above this, Debt Mutual Funds are liquid.

Medium to Long-term debt funds & Gold bonds are broadly current smart options. Apart from pure Debt funds, there are some good Hybrid funds which invest in a mix of Equity, Debt and Gold to explore.

Happy Investing!

R♥Vi

Mutual Fund Investments are subject to Market Risk, Please read the scheme documents before Investing. This is not a Recommendation. Fund Wallet is a AMFI Registered Distributor of Mutual Funds.