It is advised to have debt funds as an integral part of your debt portfolio. Slightly higher returns and tax considerations are amongst the parameters to select these funds over the traditional avenues. Pure accrual funds are supposed to be core of this portfolio. However, the returns given out for these funds in your magazine have very little edge over bank FDs strictly on the returns front. If I take into consideration the expense ratio the returns are dismal. Are the returns given out post expense ratio? Also, does it make sense to hold these funds over a 5-10 yr period?
- Anand Shah
The NAV declared by the fund houses already takes into consideration the expenses declared by the fund. So the returns you see are post-expenses. Debt funds have two key advantages over bank FDs. Unlike a bank FD which gives you a fixed return, a debt fund actively manages the portfolio to take advantage of rising or falling rate scenarios. This can at times result in higher returns from debt funds. Today, the highest one-year return generated by a debt fund is 17.18 per cent and only few funds gave returns below 8.5 per cent which demonstrate the fact that these funds are capable of delivering higher returns than other fixed instruments. Open end debt funds also offer anytime liquidity at no cost, which a bank FD won't offer. So, even after the taxation changes in budget debt funds can be a good pick if you are looking for liquidity, higher returns and have a short time horizon.
If you are looking for investing money for a 5-10 year period and have a conservative outlook towards investments, then balanced funds which invest over 65 per cent in equity and the rest in debt securities would be a good addition to your portfolio. These funds can give you an added advantage in terms of higher returns and you will be exempted from paying tax after completion of a year. A holding period of 5-10 years can usually reap the benefits of investing in equity.
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