Mutual Funds offer varied solutions for different financial goals depending on the tenure of investment. An investor can select a fund or a combination of funds based on the returns she is looking at after a specific period of time. In an interaction with Himali Patel, SBI Mutual Fund Chief Business Officer DP Singh shares the current dynamics of investing in mutual funds in the backdrop of the low interest rate regime.
A large part of investors depend on small savings schemes for their retirement income. With the interest rates moving downwards over the past few years, what options do they have that are less risky yet high on returns?
India has been witnessing a falling interest rate scenario for a few years now and it seems likely to continue for the next few years. Low interest rates are essential to give the boost to a slowing economy. This has, in turn, hurt investors investing in traditional investment avenues. However, the government is still offering higher interest on savings instruments than the market rates.
Capital market products and traditional savings instruments cannot be compared completely. Mutual funds have always been a graduation from fixed return products to market-linked products, where there are chances of high returns but also with some risks depending upon the asset class. Fixed Maturity Plans (FMPs) offered by mutual funds are the closest to traditional fixed return investments as they aim to lock-in the yields at prevailing market rates.
Additionally, mutual funds offer varied products to cater to all goals – be it short-term, medium-term or long-term. For long-term gaols, investors should opt for equity funds. Debt funds can be looked at for very-short-term to short-term goals. Mutual funds also offer a bouquet of hybrid products that invest in a mix of both debt and equity. Debt investments provide stability and equity investments can provide a kicker to the overall portfolio returns. Investors can choose from equity hybrid (relatively higher equity exposure), debt hybrid (relatively higher exposure to debt) or multi-asset allocation funds (asset allocation moves between debt and equity based on market dynamics) depending on their risk appetite and investment horizon.
MFs are being referred to as solution-oriented options. How can millennials use MFs to build their retirement portfolio in current situation?
Mutual funds have always been considered as akin to equity investments. It’s recent that retail investors have started understanding that mutual funds offer varied solutions for all the financial goals – be it short-term, medium-term or long-term. With respect to building a robust retirement portfolio, investing systematically, changing your asset allocation, based on age and not disturbing these investments prior to the goal, are the key aspects.
Sebi has outlined a separate category for specific goals such as retirement, called retirement benefit funds. Millennials should start their investments with such aggressive plan which has higher equity exposure and can opt for the automatic switch facility. This feature also automatically moves the investments to the next best plan based on age i.e. the investment amount gets shifted to lower risk plan as you near the goal, reducing portfolio volatility near the retirement age.
What is SWP in layman terms? Is there a tax benefit for investors when it comes to using MFs for maintaining their post-retirement cash flow requirements?
SWP is Systematic Withdrawal Plan (SWP). It works the same way as a Systematic Investment Plan (SIP). SIP is akin to recurring deposits, while SWP works like annuity. In case of SIP, an investor invests a predetermined amount on a periodical basis in the selected scheme. Similarly, in case of SWP, an investor receives a predetermined amount on a periodical basis. Simply put, it’s staggering your redemptions over a time period. SWP helps meet the requirement for regular cash flow. As far as tax benefit is concerned, SWP is a tax-efficient solution for meeting investors’ regular cash flow requirements. If an investor gets Rs 10,000 in interest payment, the full amount would be taxable as per the prevailing tax rates. While in case of SWP, the amount received would include both invested amount (`9,000) and capital gains (`1,000) and the investor has to pay tax only on the capital gains part of the withdrawal amount or Rs 1,000. To keep the value of the fund intact, investors should review the investment amount in the fund on regular intervals.
Should an investor with a lumpsum amount invest in equity or in debt MF?
Deciding which asset class to invest in is a function of the goal or the time horizon an investor is investing for. If an investor is looking to invest for the long term, he should look at investing in equity and for a shorter time horizon, investment in debt mutual funds can be looked at. If one is wary of investing in the equity markets in one go, it is advisable for them to invest in short-horizon debt funds such as savings fund and opt for a Systematic Transfer Plan to an equity scheme. With this facility, they can keep earning relatively better returns on the lumpsum amount as against keeping them idle in the bank account as well as invest systematically in equity schemes.
Will you advise doing both equity and debt SIP to investors at the early stage of life?
Definitely. Starting early and investing through the SIP route is most advisable. The SIP route of investment is advisable as it helps sail through volatile times smoothly due to benefits of rupee cost averaging. Every investor has different goals: short-term, medium term and long-term. For short-term funds, investors should look at SIP in debt funds, for medium term goals, they can start an SIP in any of the hybrid schemes, and for long-term, it’s always advisable to start an SIP in equity schemes.
Investors often associate volatility as being synonymous to equity markets and consider it as an opportunity to create long-term wealth and the debt funds are considered to be relatively more stable. Debt funds are relatively less volatile as compared to equity mutual funds. Debt mutual funds also go through volatile times as we saw last year. If volatility in equity markets can be managed efficiently through an SIP and aid in wealth creation, then the same route should be used to navigate volatility in debt investments too.