I'm planning to park my surplus cash (which I might use for buying a home within 1-3 years) in some debt fund. However, I'm baffled by the choices that are available in the market. There are corp bond funds, income funds, PSU debt funds, liquid funds, and some others. Could you please help me in choosing one based on my requirements. It should meet the following criteria: One, it should not have an exit load applicable beyond one year. Two, it should have a good history of performance (it should have given at least market/benchmark returns over the long-term. Three, it should have a competitive expense ratio. I'm psychologically more comfortable with Axis, Franklin Templeton, ICICI and HDFC due to my history of investments with them.
- Rishi
It wouldn't make much sense to invest in debt schemes if you are in the 10 per cent or 20 per cent tax slab. This is because long-term capital gains on these funds on investments held over three years are taxed at 20 per cent with indexation benefit. Such people can park the money in bank deposits.
However, if you are in the 30 per cent tax slab, debt funds can offer you better post-tax returns. Since we are witnessing a falling interest rate scenario (the RBI has reduced rates by 1.25 per cent this year) and you have an investment horizon of around three years, you can consider these two options: a fixed maturity plan (FMP) or a dynamic bond fund. You can choose an FMP from a reputed fund house if you want to lock-in your money for a predictable return.
If you are ready to take a little extra risk and want to benefit from a likely fall in interest rates, you can choose a dynamic bond fund. Dynamic bond funds have an actively managed portfolio that varies dynamically with the interest rate view of the fund manager. This means an investor need not take a call on interest rate movements and leave the job to the fund manager. Some may argue that long-term debt funds (income and gilt funds) may benefit more from falling rates. However, an average investor would find it difficult to take a call on interest rate movements and time the entry into and exit from these funds.
You can choose one of these top-rated dynamic funds: Birla Sun Life Dynamic Bond Fund, Tata Dynamic Bond Fund and UTI Dynamic Bond Fund.
This article was originally published on October 09, 2015.
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