Get debt fund mix right with tax-free bonds, hybrids and accruals
Interest rates may continue to be under pressure in the immediate term due to a number of factors – higher inflation due to rising pulses, fruits and vegetables, a likelihood of the adverse impact of a lower rupee.
The central bank is also less likely to go for further rate cuts, given the doubts about price performance in the near term. The change in US policy stance will also have significant impact in the days to come as the currency yield of the US dollar is edging higher.
For a common investor these factors make the scenario a bit more complex as the real returns from investments would be low. It may not be possible to move entirely into debt products as asset allocation for long-term growth would dictate some amount of equities as well. At the same time, it is difficult to make out where the interest rates are likely to peak, though at the long end a level close to 8% should hold well. Under these circumstances, the combination of debt products that one chooses is critical to overall portfolio performance in the long run. It is not just the broader allocation between debt and equity that would matter, but also the allocation into sub-asset classes is equally important in determining the final outcome, stability and growth. The stability requirement could be met with some allocation to tax-free bonds and accrual funds, and the growth requirements could be achieved by taking exposure to hybrid funds.
For long-term investment portfolios, tax-free bonds can bring in stability; there is a plethora of issues nowadays and more are planned by the government institutions. About 10% of the portfolio may be invested into these products. Instruments in this category are available for very long maturities like 10 to 20 years and more. Given the broad macro-economic scenario, it is less likely that there would be much higher coupon available from tax-free bonds in the near future except under very exceptional circumstances. It is imperative that the investor looks at the tax efficiency of investments, mainly in the debt space as equities have an inherent efficiency.
One of the choices available to investors is to allocate funds to accrual products of both short-term and long-term nature. Accrual products have portfolios with relatively high coupons, and therefore, higher level of accruals.
Read full article: DNA India
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