Fintso, a vertical aggregator for independent financial advisors, end consumers and mutual fund manufacturers, empathizes on rethinking if Debt still should be a part of client portfolios in their recent report. As per a report, Debt securities, which add stability to the overall portfolio, have shown more volatility than even equity in recent times – the question is not about return on capital anymore, but the return of capital. Over a longer period, the performance of any asset class tends to smoothen out and there is still merit in having a diversified portfolio. Given the nature of the Debt asset class, there is still merit in having this asset class as part of the core portfolio.
With recent developments, MFs have been viewed as a risky investment product. But they do offer the dual benefit of liquidity and lower taxation. Hence, Fintso report recommends advisors to continue to access various funds for their specific risk-reward requirements and make appropriate investment recommendations.
The research presents a framework for the investment options and their performance to simplify the decision making process for Financial Advisors and investors:
• Direct Investments – Corporate FDs & Debentures, Bank FDs, Government Bonds, PF/ EPF, etc
• Indirect Investments – Debt MFs which in turn invest in these fixed income instruments
The investment products need to be evaluated from three factors: Safety, Liquidity and Return.
While safety is about the return of your capital, Liquidity indicates the flexibility in getting your money back as and when required, these often get compromised during difficult times. For eg, Mutual Funds which had at least the assurance of liquidity had to suddenly ‘Wind-up’ and stop all redemptions or ‘Side Pocket’ such securities which were unable to repay their principal on maturity. Following are the products whose performance have been assessed basis of these factors:
Bank FDs: Option to exit with a small penalty
RBI Bonds: Not traded on exit, Hold till maturity
Tax-free bonds: traded on exchanges
PPF: Hold till maturity (can withdraw after 5th years onwards
Corporate FDs: Can liquidate with minor penal charges
Products apart from Mutual Funds generally provide high visibility of returns and also merit a place in investors’ core Debt portfolio. Therefore, a Debt portfolio must be designed considering investors tax status, safety, risk appetite and liquidity needs.