Debt MF: Suit the debt MF to your risk appetite

Mumbai: The markdown in papers of Vodafone Idea by Franklin Templeton, which has led to markto-market losses of 4-6 per cent for investors in schemes that held the paper, has revived worries about the safety of debt mutual fund products. In the last two years, there have been mark to market losses in various debt schemes due to schemes holding paper of IL&FS, DHFL and some ADAG companies. Investors have been hit across categories of mutual funds — be it ultra short term, duration or credit. This has perturbed debt mutual fund investors who are increasingly wary of putting money into these schemes.

Small investors, who do not have the skills to research mutual funds themselves or find it unviable to hire financial advisors, would be better off sticking to traditional fixed income products such as bank deposits, PPF and post office deposits. “Retail investors who do not understand the nuances of debt mutual funds would be better off sticking to plan vanilla bank deposits till the environment improves,” said Ashish Shanker, head (wealth advisory), Motilal Oswal Wealth Management.

But investors with a higher tax outgo should invest more of their fixed income corpus in debt mutual funds, said advisors. The investments, however, should be done on the basis of risk appetite.

“When investing in debt follow the principle of safety first followed by liquidity and capital appreciation.,” said Anup Bhaiya, MD, Money Honey Financial services. Debt funds have a portfolio of securities which lowers risk compared to holding a single company security. Investors in the higher tax bracket have preferred debt mutual funds in recent years because of the better tax treatment.

“For investors who are in the high tax bracket, debt funds are a substitute for fixed deposits with tax arbitrage,” said Vishal Dhawan, chief financial planner, Plan Ahead Wealth Managers.If investors hold debt mutual fund schemes for three years, they get the benefit of long-term capital gains with indexation benefits, lowering the tax outgo significantly. ET has compiled debt mutual fund plans for conservative, moderate and high risk investors based on inputs from financial advisor.