Roll-down strategy gives a certainty on returns and are tax-efficient because tax is levied only on exit (after indexation) besides there is no lock-in period, unlike FDs
Analysing the changing dynamics of personal finance has never been more crucial as in the covid-19 times. In view of the Monetary Policy Committee’s decision to lower the interest rates, it is pertinent to understand the impact on long-term wealth creation. As part of our discussion on the “future of long-term wealth creation—strategies in turbulent times," we spoke with experts, including Axis Bank chief economist Saugata Bhattacharya, Famy Care Ltd managing director Sanjeev Taparia, and Bharat Pareek, the head of product and segment, private wealth, ICICI Securities, to explore what high net-worth individuals and institutional investors are doing to create wealth amid the pandemic. Edited excerpts:
In view of the economic slowdown amid the covid crisis, fixed deposit rates are on a steady decline. What is the outlook?
Bhattacharya: In a deposit-centric banking system like India, where people prefer to keep their savings in fixed deposits, there is a limit to cutting interest rates as part of a policy response. Especially in a highly uncertain economic environment, like the present times, where returns on risk-free or low-risk instruments become important decisions on savings.
Are more debt-style investments seeing favour with investors?
Taparia: Yes, debt funds make a lot of sense. But the approach has changed. A quasi-government organization, such as the IL&FS (Infrastructure Leasing & Financial Services), which was stripped of its AAA rating, taught us that one needs to play safe in the debt market. The key objective now, while investing into debt instruments is to ring-fence the corpus to insulate against market volatility, while aiming to earn inflation-beating returns. So, we look into safety, tax-efficiency and visibility on long-term growth, while investing in debt . This is why we chose to invest in funds which follow a roll-down strategy for G-Sec (government securities) investments. We have observed that investment in such products, which has a maturity tenure of 25-30 years, provides optimum yields at low risk. Roll-down strategy gives a certainty on returns and are tax-efficient because tax is levied only on exit (after indexation) besides there is no lock-in period, unlike FDs.
What is key from a long term wealth creation point of view?
Pareek: The future of wealth management is going to be defined by right asset allocation. We are increasingly seeing huge traction for investment in a roll-down product that gives you the opportunity to invest in a fund where your return visibility is extremely high, such as investing in 10-year roll-down schemes like L&T Triple Ace and Axis Dynamic Bond Fund, or for long duration Nippon India Nivesh Lakshya (30 years). Investors also look at funds with a 3-year horizon at IDFC Banking and PSU, Nippon India Floating Rate Fund. At present, the probability of making capital gains is very low as the interest rates are expected to remain low with ample liquidity in the system. That is why I would prefer to invest in a safe portfolio of, say, G-Secs roll down over and above funds mentioned above, which is rolled-down with safety of sovereign credit, predictable expected returns and liquidity.