Balance risks & returns with optimal mix of equity & debt

 Balance risks & returns with optimal mix of 
equity & debt

Align your fixed income strategy with your risk profile & financial goals.

THERE HAS BEEN much discussion on whether it makes sense to allocate more to fixed-income investment in India, given that returns on such investments are marginally above the inflation rate. There are several factors to consider when making this decision, including the outlook for interest rates, the performance of fixed- income investment in recent years, and the impact of recent tax changes on debt mutual funds.

Bank FD rates

Since May last year, the Reserve Bank of India has been increasing interest rates. Bank FD rates are now in the 5.50%-7% range, depending on the bank and whether it’s a PSU bank or private or neo bank/ NBFC. This has made bank FDs attractive for investors looking to get stable returns. Senior citizens can also look at an increased interest rate of 8% in SSC, where the limit also has been increased to Rs 30 Lakh

Similarly, as rate increase, the yield of long-term bonds becomes attractive, with the yield on 10 years bonds at 7.31% in February 2023, up from 6.43% in February 2022. This can be a good opportunity to invest in long- terms bonds, including gilt funds, which have an average return of 7.5% to 8.00%.

Scrapping of LTCG tax benefits on debt funds

Apart from FDs and bonds, another debt investment option is debt mutual funds. On average, debt fund returns are 6% -8% and are popular among investors, especially HNIs and UHNIs. Till this financial year, any debt funds beyond a three year period were taxed at 20% LTCG after indexation benefits. For debt funds held for less than three years, tax implication was a per tax slab.

However, as announced in the Finance Bill 2023, from FY24, there will be no LTCG or indexation benefits on debt funds. While this amendment will be a blessing in disguise for FDs and bonds with increased investor participation to leverage tax-saving, debt funds are likely to take a significant hit.

What should investors do?

The answer to whether investors should allocate more funds to debt instruments in the new financial year depends on their individual requirement. While inflation-beating returns are attractive, one should approach fixed-income investments by analysing ones shorts-and long term financial goals and risk profile.

Instead of skewing more towards debt instruments with slightly higher real return potentials, constructing a diversified portfolio consisting of both equity and debt is crucial to balance out the risks and returns. Also, investors should undertake portfolio creation and alternation with a 360- degree perspective, considering current micro and macroeconomic conditions in the nation and globally, and after consultations with an expert.

FIXED INCOME

With interest rates rising, it can be a good opportunity to invest in long- term bonds.

Senior citizens can now invest up to Rs 30 Lakh in Senior Citizens Savings Scheme offering 8% interest.

For More Details: Pooja Manoj Gupta, visit www.giia26.com
Email: pmgiia26.com Mobile 9868944340