I want to invest a sum of money in fixed income for period of three to five years. Should I also consider fixed deposits by NBFCs or investing in Dynamic Bond funds for higher return?
- Sanjay
No. If you need fixed income and are not ready to bear any loss over medium term, then you should not invest in dynamic bond funds. Fund managers have received big surprises in the last four to five years. Rates have increased when they were expecting a cut and vice-versa. Generally, RBI has been surprising us on our expectation of the movement in the interest rate. The returns from mutual funds help you to optimise the total returns, but they don't make them risk free. If you are looking for higher guaranteed returns, you can go towards the deposits by NBFCs. But they are also not completely risk free. However, you can find a good reliable deposit on the basis of the credit rating and the company's reputation.
I feel, people should look at only two-three kind of funds in fixed income--liquid, short duration and ultra short duration. A retail investor should not venture into fixed income categories other than liquid, short duration and ultra short duration. But after the recent debacle of IL&FS, people are now scared to invest even in the liquid funds. However, I look at it more of an accident rather than a system risk. These categories can give you higher tax-efficient returns than the NBFC deposits.
This article was originally published on January 15, 2019.
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