I keep hearing that Debt funds are generally considered better than FDs mainly because of indexation benefit.
Now, indexation benefit can come only if we stay invested in Debt funds for more than 3 years.
So, are Debt funds better than FDs only if we stay invested for more than 3 years?
I have also heard that in a rising interest rate cycle, staying invested in Debt funds for long term can give poor return and can be lower than FD. We here lot of talks about interest rate may be hiked soon so we may be in this situation now.
What I have observed is most online articles suggest to invest in Debt funds. Interestingly, I have not come across much discussion on the above. It may be because when we invest in debt funds via AMCs, they get commission/fees and they are flooding the internet with ‘Debt Funds better than FDs’ articles. For FDs no AMCs get the commission so not much is written about special cases in which FDs are better.
I understand the equites are better performing assets but I am talking from asset allocation perspective where some % that is parked in Debt and wait time the market.
I fully agree with your write-up. I am a strong proponent of Asset Allocation and FD is a part of MY Asset allocation (These are my personal views and fit in well with my strategy.)
People dismiss FDs as they are called tax-inefficient. However, Tax efficiency or inefficiency is dependent on each individual tax-paying capacity. As an example, for NRI and NRI funds are non-taxed, and hence for an NRI getting non-tax income from FD would be great. Similarly, for residents, people can invest in FDs up to the tax exemption limit and give 15H form.
Investing in a debt fund is investing in Corporates, in bad times and economic difficulties, these companies will struggle to repay the interest. This is not the case with FD. I have heard experts advising people to invest their emergency funds in liquid funds instead of FD when the core nature of emergency funds is to get money when you need it.
Feroze Aziz of Anand Rathi in one of his interviews had mentioned that it is better to invest in Debt fund than going for NCD of a specific company as debt fund will have many companies than investing in a specific company. He in fact was saying that an investor should diversify when investing in debt fund by investing in few debt funds but to check that the underlying companies in which they invest do not overlap. This will result that even if one of the companies faces issues, the portfolio will be diversified and will not face major issues.
Debt fund NAV might fall when there is massive redemption which you may not see in a FD. Franklin Templeton closure of funds is a classic example.
When the market was crashing in March of 2020 and on a daily basis capital was getting eroded, this coupled with people losing jobs plus lockdown, the only ray of hope at that time was our good ole FIXED DEPOSIT.
At that time, no one complained about FDs and post office deposits.
Disclaimer: These are purely my personal views and not saying whether debt fund is good or FD is bad. Each one to his own.
I hope that it is understood that by investing in AA bonds you are taking higher risk to get higher returns.
These bonds are not strictly comparable to FDs.
In case of credit event, you can loose your capital too.
Investing in specific company’s NCD’s is very risky as any of them go bankrupt like DLF, Yes Bank etc.
Investing through debt funds provides certain protection against this. But, Franklin Templeton issue also can repeat too !!
Yes I have heard this interview and agree with it.
One approach is exhaust all the PPF, SSY etc. for all the family members and then remaining split into FD and Debt funds. But, then we have too many eggs in too many baskets !!
And, PPF, SSY have long lock-in’s.
I think that both FDs and debt funds can be part of the portfolio. For debt funds, you can invest for the medium term such as 3 years to 6 years. This will ensure that you will get FFD beating returns and you will be able to take advantage of the indexation. For the emergency purpose, it is better to stick to FDs.
If this is the approach what type of Debt funds are suitable keeping in mind interest rate reversal is around the corner? Any names that are ‘the best’ in these categories?