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I am 42 and have a debt fund corpus of ₹6 lakh for my short-term goals and emergency fund. While my equity portfolio has generated high returns over the last 2-3 years, the average return from my debt fund corpus over the past 1 year is less than 5%. On the other hand, banks are steadily increasing their FD rates with many of them offering interest rates in the range of 5.5-6% p.a. I don’t wish to invest my debt fund corpus in equity funds. Should I redeem my debt fund investment and shift to bank FDs?
-Name withheld
Rising inflation, improved credit demand and increasing crude prices have led to a sharp increase in the benchmark bond yields and other market interest rates. This is leading banks to steadily increase their FD rates. Rising interest rates adversely impact the returns generated by debt funds, especially those having longer maturity profiles. Thus, most debt funds including those having shorter maturity profiles have failed to beat the FD returns over the last year.
As the rising interest rate regime is likely to continue for some time, I will suggest you shift your debt fund investment to bank FDs yielding over 6% p.a. for 1–2-year tenures. Some of the scheduled banks offering FD yields of over 6% for 1-2 tenures include SBM Bank, Utkarsh Bank, Suryoday Bank, Ujjivan Bank, Jana Bank and ESAF Bank. Continue to invest in FDs of these banks for your short-term financial goals as long as their interest rates continue to show a rising trend. As soon as the FD card rates of these banks start showing a declining trend, you can invest your incremental surpluses or FD maturity proceeds in the direct plans of HDFC Short Term Fund and ICICI Prudential Short Term Fund. In case you are comfortable with slightly higher risk, you can also invest a part of your fixed income corpus in the direct plans of conservative hybrid funds like ICICI Prudential Regular Savings Fund and Kotak Debt Hybrid Fund. As these funds have to invest 10-25% of their corpus in equities and equity-related instruments, it allows them to generate higher returns than fixed deposits and debt funds
-Query answered by Naveen Kukreja, CEO and co-founder, Paisabazaar.com.
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