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As investors deal with the impact of the covid-19 pandemic on their investment portfolios, the focus is typically on the erosion that the equity portion has taken. Ideally, depending on the stage of the investor’s goals, there should be allocation to other asset classes too. This will provide the benefits of diversification, as well as help them meet financial needs as they arise. We tell you about three debt fund categories that are best suited to meet the needs that most investors are likely to have.
For stability
If the wild swings in your portfolio from the volatility in the equity markets are making you dizzy, it is an indication that you need more stability. This comes from diversification into other asset classes, including fixed income. Debt funds are well equipped to play this role, especially in a period when interest rates are low and traditional fixed-income options such as bank fixed deposits and small savings schemes are seeing lower interest income. Debt funds offset the impact of lower coupon or interest income with gains in the value of securities in the portfolio.
Financial advisers take a similar approach. Shilpa Wagh, a Sebi-registered investment adviser, only considers funds with at least 80% of the portfolio in AAA-rated paper to ensure low credit risk.
For liquidity
If you need to hold funds for ready access, overnight and liquid categories are the options to go for. As uncertain economic conditions threaten regular incomes, the need for having easy access to savings, without the risk of losing value, will become imperative. While savings bank accounts have been the go-to option for this, it is a good idea to divert some of the money to other products, so that you are not hit by the same type of risk.
Given the current circumstances, Naveen Rego, a Sebi-registered investment adviser and certified financial planner, recommends that investors enhance their emergency corpus to 12 months of expenses and consider overnight and liquid funds to hold a portion of it, aside from existing bank deposits.
Look for funds with large assets under management (AUM), which allows for better diversification, and choose a scheme which has a portfolio with the highest credit quality.
If you have goals that need to be funded in the next one to two years and want to keep the corpus safe in the intervening period, consider shorter duration debt funds like those in the ultra-short duration and low duration categories, depending on the period after which you may need the money.
The cap on the duration that these funds maintain in the portfolio serves to contain the volatility arising from interest rate movements. While this does limit the gains these funds can make in periods when interest rates are coming down, they still provide better returns than bank fixed deposits, along with the flexibility of withdrawing the funds whenever you require them. Make sure to evaluate the portfolio for credit quality and concentration risk while selecting the schemes.
The economy will take time to recover from the covid-19 episode and different sectors will see varying degrees of impact. So it is advisable to avoid debt fund portfolios that have too much concentration in a particular sector, unless it is backed by sovereign guarantee.
Select the schemes after due evaluation of the portfolio risks, and not on the basis of higher returns. Keep in mind that higher returns come with higher visible and invisible risks.
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