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Debt funds instead of fixed deposits?

LiveMint logoLiveMint 11-05-2017 Vivina Vishwanathan

Recently, major banks revised interest rate on bank fixed deposits (FDs). Experts tell you why you should consider debt funds in your financial portfolio instead of FDs and the process of investing in these funds.

Lakshmi Iyer, chief investment officer (debt) and head-products, Kotak Asset Mgmt

Firstly, FDs tend to be a pull product. Anything apart from FDs, including mutual funds, are push products. Hence, that extra amount of education is required for debt funds, especially with retail investors. Institutional investors understand it. Out of Rs10 that institutional investors invest, little under that is in liquid funds. Ultra short-term funds, of course, has got a decent 45-50% of institutional money as well. In fact, even the regulator has warmed up to idea of e-wallets being used for liquid fund transactions to facilitate more retail money to coming into this.

It should be a natural progression towards liquid funds given the fact that the liquidity in the system is disincentivising banks. Liquid funds are investing in underlying short-term instruments with almost negligible interest rate risk.

Usually, money in savings accounts tends to last for a long period of time. You can also look at it from a matrix perspective. Ultra short-term funds is a superior alternative (to FDs) at the current juncture.

If you are a first-time investor, you need a financial adviser to guide you. Otherwise, there are various portals that allow online transactions depending on how technological savvy you are.

I do not agree with the point that the investment process in mutual funds is difficult. It is, in fact, quite seamless.

R. Sivakumar, head-fixed income, Axis Asset Management

There are different types of debt funds across different types of risk. When we look at the money market type of products in liquid, ultra short-term and short-term space, there are many volatile as well as low-risk debt funds that are consistently managed to deliver returns higher than passive alternatives, including bank deposits. Keep in mind that you need to match the tenure with the type of funds. For example, if your investment horizon runs from a few days to a few weeks, then you should consider liquid funds. If your investment horizon is 6 months to 1 year, consider short-term debt funds.

The mutual fund industry has delivered significantly better returns than other alternatives. Another important point is that if the investor has a holding period longer than 3 years, then you are certain to get benefits of tax treatment since you can avail the long-term capital gains tax benefit. Many investors we know have a reasonable allocation to fixed income even if they keep money in 1-year FDs. Typically, that tends to get rolled over. There is a reasonable allocation towards debt products. If we look from a mutual funds perspective, open-ended funds give you the option to redeem at any point of time. At the same time, if you stay invested for more than 3 years, then you get long-term capital gains (tax advantage) as well.

Srikanth Meenakshi, co-founder and chief operating officer, Fundsindia.com

Recently, State Bank of India deposit rates have been slashed to 6.25% in the 2-3 year time frame. For senior citizens, too, rates for similar tenures are now lower by 50 basis points, to 6.75%. Clearly, FD as an avenue of investment or income generation has lost sheen and locking in now for 2-3 years would mean significant opportunity loss to investors. So, yes, investors should look at alternate options with similar risk profile as FDs, but with a higher return potential. For investors who are not looking for regular income, lumpsum investments in short-term debt funds and income accrual funds under the growth option are ideal avenues. A holding period of over 3 years would also fetch capital gains indexation benefit.

For senior citizens looking for steady income, a mix of post office Senior Citizens’ Savings Scheme and some amount parked in ultra short-term and short-term debt funds of high credit quality would be a good diversification option. They can first use systematic withdrawal plan from the ultra short-term category and later from the short-term debt category to generate regular income.

Those who are not comfortable with online or digital processes can approach the fund house or a financial adviser. The online route, however, is becoming popular for its paperless convenience and quick transaction capabilities.

Surya Bhatia, managing partner, Asset Managers

It is about breaking inertia and understanding something beyond what you already know. That’s all it takes. You are used to investing in FDs, so you can approach your bank, go to the bank manager, sit there for half an hour and get it done. This is especially true for senior citizens.

In case of other instruments like a debt fund or an ultra short-term debt fund, you have two options depending on how internet savvy you are and whether you are comfortable enough to go through the process yourself, or want the help of an adviser. Both options are equally easy and comfortable.

When you go to the bank, you have to do the know-your-customer (KYC) procedure. Similarly, for debt funds, too, you need to do the KYC with photograph, address proof and signature. It is a simple form that is easy to understand. Like you sign for an FD, you do the same for a short-term fund or an ultra short-term fund. The procedures are similar; you just need to get used to doing something different.

I am not saying that one should get rid of all deposits. But one must gradually come out of it, understand what the (new) product is, don’t put all your money in ultra short-term funds because it will not give you the comfort factor. Start slowly and see how it turns out. Once you are confident and comfortable, you can increase the amount.

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