As known, debt funds give stability to client’s investment portfolio. It also adds stability to MFDs’ assets under advisory and can also create a good investor experience especially when the going is not so good in the equity markets.
Intending to share in-depth insights from the debt market, Mirae Asset MF in collaboration with Cafemutual has launched a specially curated online series - Debt ki Pathshala. The first episode hosted Swarup Mohanty, CEO, Mirae Asset MF and Mahendra Jajoo CIO - Fixed Income, Mirae Asset MF who spoke about the significance of debt funds, SIPs in debt funds and much more. The discussion was moderated by Nishant Patnaik, Associate Editor, Cafemutual.
Here are the key highlights from the episode.
Debt funds deserve a place in clients’ portfolio
MFDs typically shy away from debt funds as they feel investors have adequate exposure to debt instruments through mandatory pension contribution and bank FDs. However, the panel points out that there is a rising need of asset allocation in clients portfolio and with the quarterly review by the government on savings schemes, fixed return regime has come to an end. Hence, it makes a very good case for MFDs to practise allocation to debt in a far stronger manner than the past.
Typically, investors having long term surplus and the ability to absorb some volatility are missing out on debt funds that have potential to deliver better returns than bank FDs.
Simplifying the debt fund narrative
Broadly speaking debt funds are of three categories - short end of the spectrum which includes liquid fund and ultra-short-term fund. In the second spectrum, it includes short duration funds. At the longer end of the spectrum, it includes dynamic bond funds, banking & PSU funds and corporate bonds funds. In the last couple of years, SEBI and AMFI have come out with several measures for simplifying debt fund evaluation. Today, these funds are categorised, thus each fund’s risk profile and investment pattern can be understood. Also, the risk-o-meter that was recently introduced gives a good flavour of the fund’s risk composition. Just like equity mutual funds, the investment horizon must be matched with that of the fund and the fund manager must be allowed to navigate through the market volatility.
Investing in debt fund through SIP mechanism
Historically, the biggest investment habit of Indian investors has been recurring deposits in a bank. Investors are thus familiar with making systematic investments. However, past data suggests that the return in a similar category of debt funds generated better returns. The SIP mechanism helps tackle better volatility in the debt market arising due to interest rate or credit risks.
In SIP investing volatility is the investor’s best friend. Thus logically, SIP creates a more rewarding experience in the longer duration segment of the debt funds, where the associated volatility is comparatively higher.
Debt fund categories for addressing financial needs
Currently, there are 16 debt fund categories in the market. However, they have overlapping features. Broadly debt funds can be categorised into 3 categories as captured above. The short end of the spectrum is primarily suitable for investors with very short term surplus, not wanting to take any capital risk. In the middle segment, there is the short-term category where the duration ranges between one and three years. This category is suitable for those who are willing to look at debt funds for improving their return profile but don’t want to participate in a very aggressive way. The long duration category gives the investor a full flavour of investing in fixed income as interest rate and credit risks are significant. These funds invest typically in high-quality credits. For instance, in banking & PSU funds a minimum of 80% has to be invested in banks and PSUs which are typically either government-owned or tightly regulated by the Reserve Bank, so the credit quality is by definition slightly better. This category is suitable for investors with a longer investment horizon.
Debt funds V/s bank FDs
Debt funds have delivered attractive returns compared to bank FDs in the past. Even today, when the interest rates are historically low, liquid funds are giving returns in the range of 3.25%-3.50% as against 2.50% in case of its closest comparison i.e. bank savings account. Debt funds being market-related products are expected to always outperform bank FDs.
You can view the first episode of Debt ki Pathshala on Cafemutual’s YouTube channel by clicking here.
