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Investing? Try MIPs, FMPs for safety
January 22, 2007 10:49 IST
Few would dispute the fact that conditions in debt markets haven't been conducive from a long-term (over 12 months) investment perspective over the last few years. In fact, it's been quite a comedown from 2002, when long-term debt funds were the investors' darlings, thanks largely to a softer interest rate regime. Since then interest rates have witnessed a cycle and at present they are on the rise
In the recent past, the Reserve Bank of India has consistently raised its key lending and borrowing rates. And the uncertainty regarding how high interest rates will go isn't making the investor's cause any easier. Contrary to popular belief, we expect interest rates to rise even further. Hence, at Personalfn, we prefer to take a cautious view on the debt markets at this point.
Some of the factors which could ensure that interest rates rise going forward are - the growing inflationary pressures (fuel prices were cut recently but sooner or later populism will have to give way to realism and the crude price rise will have to be passed through to the consumer); and increasing demand for credit.
In light of the same, we present some debt fund categories which investors should consider for the purpose of investment in 2007.
1. Fixed maturity plans
Another variant from the FMPs segment is the one wherein a smaller portion (usually upto 20%) is invested in equity assets. Such FMPs offer the twin advantage of capital protection (taken care of by the debt portfolio) and capital appreciation (provided by the equity portfolio).
FMPs hold an edge over other avenues like fixed deposits in terms of tax-efficiency. Hence for investors in the higher tax brackets, who wish to invest in the debt funds segment, FMPs could make an apt fit. Investors would do well to appreciate that FMPs are structured to offer capital protection and appreciation; however, there is no explicit guarantee on either front. To that end, FMPs are different from FDs and would rank higher in terms of a risk-return trade off as well.
2. Monthly income plans
Often the equity component is the defining factor for MIPs. While low-risk MIPs would typically hold between 10-15 per cent of their assets in equities, the high risk ones can hold as high as 30 per cent of their assets in equities. Like most hybrid instruments, MIPs offer the proposition of diversification across asset classes. The debt component is intended to offer stability to the portfolio, while the equity component is utilised to offer the much-needed impetus i.e. capital appreciation.
3. Liquid and short-term floaters
Liquid funds (which typically have very low maturity profiles) can prove to be the apt avenue for investors who wish to park their funds for shorter time frames. Investors who have an investment horizon of a couple of weeks should go in for "Liquid Plus" funds, which offer a relatively better yield, without taking on much additional risk.
4. Short-term fixed deposits
In conclusion, we would like to remind investors of the importance of having access to an expert and qualified investment advisor. An investment advisor has a vital role to play in ensuring that you achieve your financial goals. He is the one who will help you select the right instruments from across categories and construct a portfolio that is aligned with your risk profile. Once investors have access to the right advisor, it would be fair to assume that the right instruments will follow.
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