A well-balanced portfolio requires a good mix of equity and debt assets to maintain a fine balance between safety and returns. But with debt returns plummeting to record lows, investors are finding it difficult to remain invested in debt schemes.
Most debt fund categories have performed poorly in 2021. In fact, most funds even failed to match the returns of bank FDs. Data from Value Research shows that dynamic bond funds delivered 3.5% return in 2021. Ultra short duration, banking & PSU and corporate bonds also generated similar returns.
During the same period, FDs of major banks delivered a return of around 5%.
The scenario has put MFDs and RIAs in a fix. Many have been diverting the allocation meant for debt funds to bonds, bank and corporate FDs and even hybrid funds.
"There returns are on expected lines. Given the low yields and high expense ratios, there was no scope for good returns. We have been asking clients to put money in bank FDs for the last one and a half year. And we are likely to do the same this year as returns may decline further when interest rate will start to go up," said Ranjit Dani, co-founder of Think Consultants.
Deepak Jaggi of Satco Wealth said that he is recommending bonds, corporate FDs and hybrid funds in place of debt funds.
"We are suggesting hybrid funds to clients with 3-year horizon. For those with lesser time in hand, we are recommending corporate FDs as some good companies are giving 6-7% return," he said.
"Direct investment in bonds is also a good option. There are some safe bonds offering 7-8% return. However, this option is meant only for big clients as the minimum required investment is Rs. 10 lakh," he added.
'No need to abandon debt funds'
Rahul Jain, Senior VP Research at International Money Matters believes that debt funds still offer some good offerings.
"Funds with roll-down strategy like Bharat Bonds , Gilt and SDLs make sense at presence. They offer predictable returns if held till maturity. You also get tax benefits if the investment is held for more than 3 years," Jain said.
In funds with roll-down strategy, managers create a portfolio and hold underlying securities till maturity. Like in a Bharat bond 2025, you will see that all underlying securities are maturing by 2025.
"For investors with less than 3-year horizon, the debt space is not that attractive as of now. For short term they can look at arbitrage or floater funds," Jain said.
However, he holds a contrasting view on corporate FDs. Jain says that these corporate FDs might be offering higher returns than debt mutual funds, but they carry concentration risks and on a post-tax basis they are not juicy for high net worth investors.
"5 -7 years roll down maturity funds with high-quality portfolios are now offering indicative yields in the range of around 5.5% to 6.25%. Considering 4% inflation, post-tax returns could be in the range of 5.25% to 5.75%, if held till maturity. They are also very liquid. Most corporate FDs lack on these fronts," he said.
As an MFD, what is your view on debt funds and which funds are you recommending at present. When do you see returns improving? Let us know in the comment section below.
