Most investors invest in debt mutual funds to meet their crucial short term financial goals that span up to 3 years. But what if some investors want to invest in debt mutual funds for their crucial long term financial goals even?
While many may suggest sticking to equity mutual funds for long term financial goals, few might not be willing to do so owing to their risk averse nature. Not every retail investor is suited for all equity or 100 % equity allocation. In fact, many are better off keeping few debt components in their long-term portfolios even. It may be like 60 to 80 percent in equity and the rest 20 to 40 percent in debt. The basic reason for such an asset allocation approach is that it is prudent for most investment portfolios as it caters to a balance between stability and growth.
So, what debt avenue should you consider for your investment portfolio?
After exhausting the reliable and tax-free options like VPF (Voluntary Provident Fund), Sukanya Samriddhi Yojana, PPF (Public Provident Fund), etc., you must route for debt mutual funds. More so when your investment size has considerably grown. In such times, debt mutual funds come in handy when you want to rebalance your investment portfolio in both paths i.e., from debt to equity in bear markets and vice versa in bull markets. Such 2-way rebalancing is not possible to attain with illiquid debt avenues like PPF etc.
What debt mutual fund categories are prudent for long term financial goals?
When considering debt avenue for the long term, the listed categories must be considered initially:
Short duration funds: They invest majorly in papers/bonds maturing in a period of 1 to 3 years.
Dynamic bond funds: Such funds hold the privilege to invest in papers/bonds of any duration based on which the fund manager anticipates earning a higher return.
Banking and PSU funds: Such funds invest basically in papers/bonds issued by the banks, public financial institutions, and PSUs. Those willing to face higher volatility in the short term or a little risk can avail these 2 categories even.
Corporate bond funds: Such funds invest basically in high-grade corporate paper/bonds.
Gilt or constant maturity funds: Such funds majorly invest in avenues issued by the Indian government across the periods and generally in government avenues across periods such that the average maturity is constantly maintained around ten years. As they are kind of government backed, zero risk is involved on default. However, these can witness rapid ups and downs owing to the interest rate changes in the short term.
How to proceed once you have shortlisted the debt fund categories?
Once you have zeroed on the categories, you must pick a few of the mutual fund schemes from there. In debt funds, portfolios with distinct maturities act distinctly depending on the rate cycle. When picking the debt fund, ensure to select schemes across the categories to combine the portfolios of distinct maturities. This way, you can build an all-weather debt portfolio where you do not require worrying constantly about trying to make a move depending on the rate cycle. In this way, if one category underperforms at a time, there will be another category in your portfolio making up for it. You do not require continuously changing your portfolio every time and unnecessarily trigger the capital gains taxation. Thus, a healthy blend of schemes of longer and shorter duration portfolios may work for your long-term investment portfolio.
A few of the possible combinations are:
1) Combining schemes from debt categories of banking & PSU debt fund, short duration fund, and dynamic bond fund.
2) Combining schemes from debt categories of corporate bond funds, short duration funds, and dynamic bond funds.
3) Combining schemes from debt categories of gilt/constant maturity, short duration funds, and corporate bond funds.
Remember: Your unique requirements may demand a distinct mix. So be aware of this fact when picking or taking assistance from an investment advisor.
And what if you want to opt for credit risk funds? While such funds must be a complete no over the short period, they may find their way in your long-term portfolios through the above-mentioned categories. It is fine, but many believe that credit risk funds must be limited to a very small exposure for your crucial long-term goals.
When picking the scheme, remember to give preference to the funds that have a conservation take toward managing portfolios. A scheme with a higher AUM that has existed for many years may be a better choice. Do not get tempted by the high returns of some schemes as it may be because of unnecessary risk endured by fund managers.
