MF Query Board

Readers are requested to send only one query at a time so that more readers get a chance. Have questions relating to any aspect of personal finance. Ask DSIJ at editorial@DSIJ.in and get your queries resolved.

After the Franklin Templeton case, debt funds seem to be a risky bet. Also, banks are offering very low interest rates on fixed deposits. So where should I invest the corpus meant for the fixed income part of the portfolio?

- Ravindra Kamat

There were a lot of unprecedented events that we witnessed in the month of March 2020. Not just equity but select fixed income pockets also scared investors and the markets. In case of Franklin Templeton India, six funds had to be shut down. Investors of fixed income first need to optimize their fixed income returns. However, for doing so they should not embrace unnecessary risk. Rather, they should invest in funds by taking a calculated risk. Again, your investment horizon would define which fixed income fund suits you better. A long-term fixed income investor and a short-term fixed income investor would need different kinds of funds.

Hence, if you are careful while choosing funds based on your investment horizon, it can help save you from non-market risks. In the present market scenario, it makes more sense to invest in short duration funds, banking and PSU funds and corporate bond funds. This is because the yield curve at present is quite steep and further rate cuts from the Reserve Bank of India (RBI) are unlikely as the regulator’s main focus would be on containing inflation. Therefore, do avoid investing in long duration funds, gilt funds and funds having high exposure to long duration papers.

I have been religiously investing in a multi-cap fund via SIP for the last five years and my financial goal is still around 10 years away. But since the markets have gone up and are trading at their all-time high levels, should I redeem my investments and book profits by parking the redeemed sum in bank fixed deposits?

- Sudhir Mishra

We can understand that you are quite tempted to book profits at such record high levels and move to some safer investment options. Further, when the markets get into the correction mode, buy the units again. Though this strategy makes sense on paper, it doesn’t hold much practically. So, why isn’t it practical? First, bank fixed deposits (FD) are presently offering record low interest rates. The interest rates are so low that they give you negative inflationadjusted returns. Secondly, by doing this you are trying to time the market. Though we are not saying you cannot try timing the markets, this requires rigorous practice, knowledge and time.

Finally, if you redeem now, there are high chances that you won’t be able to get the units at average net asset value (NAV) that you are enjoying now. But if you still wish to do so, then don’t stop your systematic investment plan (SIP). Shift your accumulated lump sum to some fixed income securities. But again you need to dedicate time and do it quite actively. Since your financial goal is still 10 years away, it doesn’t make sense to redeem from equities. This is because equities will definitely flourish by then. They are not as slow moving as gold.

Also, if you are burdened by anxiety at such high market levels, it is always better to diversify your investment across asset classes. We would suggest you to have at least 20-25 per cent in debt mutual funds (assuming you are an aggressive risk-taker). This will provide your investments a certain cushion. Remember to switch to debt in a staggered manner as you start moving near towards your financial goal. You should have 100 per cent in debt when you are three years away from your financial goal. This will help you to have certainty of achieving your objectives.

Further, we also feel that you should not just depend on a single equity mutual fund. Try to have a diversified mutual fund portfolio that would have large-cap fund, mid-cap fund, debt funds (depending upon your investment horizon) and gold fund or exchange traded fund (ETF). As you are planning to attain financial goals, we would suggest not adopting tactical asset allocation and active management strategy. Rather, go with strategic asset allocation depending upon your risk appetite and passive management strategy to complement with. Use tactical asset allocation with active management strategy only for wealth creation and not for achieving any financial goals.

Why do short duration funds sometimes show negative returns in their weekly performance?

- R Disha

This happens simply due to the price movement of the underlying bonds in these funds. Similar to stocks, even bonds trade in the secondary markets and their prices too are subject to volatility. That said, the volatility may not be of that intensity which we usually witness in the equity markets. However, they still move up and down. There could be various reasons such as changes in yields or even in the risk perception of a certain type of bonds or the issuers or changes in key monetary policy rates. Hence, such factors affect bond prices, triggering those weekly changes. If you are considering investing in short duration funds, your investment horizon should be of at least one year or more. And when your investment horizon is set right, the weekly ups and downs won’t really matter.