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Earning More Than Fixed Deposits

I have a large investible surplus for a long-term and aim to achieve a return higher than what banks offer in fixed deposit schemes. I have been advised to invest in debt or gilts funds. Should I go ahead?

I have Rs 20 lakh to invest in debt or gilt funds. I have been advised to invest in Templeton India Income Builder, Templeton Gilt, HDFC High Interest, Alliance Liquid Fund, HDFC Income or Liquid Fund. I am looking at a return of 3 to 4 per cent above bank fixed deposit rates. I have a very long-term view for these investments. Can you improve on the advice I have received?
Puja Chopra

Forgive us for being the carrier of bad news, but there is no way that debt and gilt funds are going to earn you 3 to 4 per cent above bank rates over a long period. What we are saying here appears to fly in the face of recent history, but you must realise that in the last couple of years, such funds have given high returns because of a continuous drop in interest rates. This phenomena is simply not sustainable.

To get the returns that you'd like, at least 10 to 15 per cent of your portfolio must be in equities. You can do this by investing in a couple of diversified equity funds. Take a look at Value Research Online to identify suitable ones. This will certainly add some risk to your portfolio but may be the only way of earning high returns.

Equities are the only instruments, which can deliver returns greater than those from bank deposits over the long-term. Sure, equities are volatile but your long investment horizon helps in reducing the risk from that volatility. Over a five to 10-year period, the gains that a well-managed equity fund makes during the good times are very likely to outweigh the losses it will incur during the bad times.

In case equities do not tempt you then you could reconcile yourself to lower returns and stick to the portfolio that has been recommended to you as all these funds are sound ones. However, if your investment horizon is genuinely long then you should avoid the two liquid funds you have mentioned. Liquid funds offer lower returns than other types of debt funds. They are designed for the short-term and offer no advantage to long-term investors.

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