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How should a retiree lock gains in the current bull run?

Dhirendra Kumar talks about the right approach to locking equity gains and why it makes sense to invest in debt funds.

I am a 60-year-old professional and currently, I am sitting on a huge capital appreciation in my equity portfolio. I would like to lock this profit. Should I switch to bank fixed deposits or debt mutual funds? If I decide to go to debt mutual funds, is there any risk to my capital? And if at all debt mutual funds are the way to go, then please suggest 2-3 good debt mutual funds where I can invest.
- J.D. Joglekar

If you want to really lock the gains, the only way to go is to move your money from equity to debt so that it is no longer dependent on the market. However, one should understand that while equity is very risky in the short run, despite the madness of the equity market, it is not so risky in the long run. But if your situation is changing, for instance, you are 60 years old and you want to lock a substantial part of your gains so that you don't regret it in the future, it's a good idea to be invested in debt mutual funds. But do the planning of shifting from equity to debt accordingly and don't stay out of equity completely. Do realise only a part of the gains.

Now let me explain to you the difference between fixed deposits and debt mutual funds and which amongst them is better. If you invest a large sum of money in a fixed deposit in a bank, your annual interest income from that is completely taxable at the rate of the tax bracket you fall in. In contrast, if you invest in debt funds, nothing is subject to tax until you realise the gains. Moreover, at the time of realising the gains if your holding period is less than three years, then the gains are treated as your income and taxed as per the tax bracket you fall in. However, if the holding period of your fund is more than three years, the gains are taxed after indexation at 20 per cent, which turns out to be adjusted for inflation and hence a far lower rate of tax as compared to the fixed deposits.

Coming over to the issue of capital protection with debt funds - are debt funds safe enough? While many debt funds are safe, the principal thing about debt funds is that they don't guarantee any fixed returns. Of course, the returns derived from these funds are very much in line with the prevailing interest rates in the system. One should deal with debt funds very carefully as they do carry certain risks. I think what has happened in the last 1.5-2 years, there is nothing risk-free even in the bank deposit arena. But when it comes to bond funds, overnight and liquid funds are tending to be risk-free, but they yield very low returns. The returns offered by these funds today are comparable to the savings bank account and hence one should avoid taking a chance with them. More so, these funds don't make much sense for small individual investors. I would say that err on the side of caution, never get attracted to the debt funds because of high returns. While choosing a debt fund, don't chase recent past performance and look at the portfolio quality.

Coming to suggesting some good debt funds, you can consider short-term debt funds such as Axis Short Term Fund, IDFC Bond Short Term Fund, L&T Short Term Bond Fund and HDFC Short Term Debt Fund. Here you will not get extremely high returns but you will get superior returns close to fixed deposits in a very tax-efficient manner and also, you will not arrive at paying taxes till you realise the gains.

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