MF Query Board

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.

Does it make sense to invest in debt funds during a rising interest rate scenario? How should one approach investing in debt funds at times like this?

- Vishveshwar Gupta

From the beginning of the year 2021 we can see that the bond yields have been on the rise. However, the rise in bond yield is not amidst increase in key policy rates such as repo or reverse repo rates by the Reserve Bank of India (RBI). And we believe it is not expected to change in the near future as the RBI has maintained its accommodative stance to support and push the economy. The reason for the rise in the bond yields is due to a global phenomenon along with the concerns revolving around inflation. Moreover, the concerns were also regarding the exceptionally high borrowing program announced by the government in the FY 2021 budget.

That said, from now onwards the pace of rising bond yields is likely to moderate when compared with the start of the year. However, an upward bias on the bond yields also cannot be ruled out. This is the reason why investors should avoid investing in debt funds having high exposure to longer duration papers. At the current juncture, one should avoid investing in funds such as gilt funds, medium to long duration funds and long duration funds. This is because any further rise in the bond yield would adversely impact the returns from the funds dedicated to such papers.

Therefore, we believe that in the current market situation, you should stick to funds like short duration funds, corporate bond funds and banking and PSU funds. But, if you have a clearly defined investment horizon, then you can consider investing in a high-quality fund following a roll-down strategy where you may simply need to match your investment horizon with that of the target maturity of that fund. Doing so would significantly reduce the interest rate risk. But if you prefer actively managing your debt fund portfolio, then at the present situation you can take the advantage of RBI’s stance and invest in medium to long duration funds.

Even credit risk funds look like a better bet. This might help you earn better returns in the short run. However, you need to keep an eye on developments and track the RBI’s move as well as global factors. This can be a tiring task for many investors. Therefore, such investors can also prefer investing some part of their portfolio in dynamic bond funds. Moreover, you need to note that investing in dynamic bond funds or credit risk funds is a risky proposition and thus you should invest in them only if you understand them.

As a senior citizen, in 2004 I had invested Rs15 lakhs in Senior Citizen Saving Scheme (SCSS) through a bank. And now I wish to invest another Rs15 lakhs in Pradhan Mantri Vaya Vandana Yojana (PMVVY) from LIC. However, one of the LIC development offices told me that as you have already invested in SCSS, you cannot invest in PMVVY. Moreover, I also asked the same to a tax expert and he too advised me not to invest. So, is there any rule wherein if I am invested in SCSS I cannot invest in PMVVY? Please clarify.

- Bharatkumar Pathak

There is no rule as such that if you have invested in Senior Citizen Saving Scheme (SCSS) it bars you from investing in Pradhan Mantri Vaya Vandana Yojana (PMVVY). You can very well invest in both the schemes individually. What it means is that you can invest a maximum of up to Rs15 lakhs in each scheme and collectively Rs30 lakhs. So, you can very well invest in both. From the taxation point of view, SCSS is eligible for deduction under Section 80 C with a limit of Rs1.5 lakhs but PMVVY is not eligible for the same. For both the schemes the gains get added to your income and are taxed as per the prevailing Income Tax slab rates.

Speaking about their returns, they do offer attractive rate of interest at 7.4 per cent. This rate of interest is good for what it offers – safety. Also, they can prove to be better investment avenues than bank fixed deposits. Therefore, we would urge you to divide your investments as 50 per cent in equity and 50 per cent in debt. And of the 50 per cent allocation to debt, invest equally in SCSS and PMVVY. For equity you can simply invest in index funds and aggressive hybrid funds.

 

 

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