CA-Kanav Mehra: Role of Debt Mutual Funds

Most investors tend to think of debt or fixed income as a mere balancing number in their expansive asset allocation plans. While they spend a lot of energy thinking about equity investments, debt merely gets residual allocation, often without much thought.

It is time to change this sub-optimal mindset. With the Indian markets offering healthy yields, debt investing through mutual funds in this scenario can make a strong contribution to one's wealth creation goals and give a substantial boost to the portfolio.

Opportunities and Stability-Unlike what many think, debt is not an asset class that gives insipid returns. The return profile tends to be predictable and stable nature is the foundation of all good investment portfolios. Historical returns suggest that investors who have been smart with their debt allocations have made attractive returns in the past. Take the example of investors who have parked all their money in 10-year Government of India securities (G-Secs) in the last 15 years. They would have made a healthy 7.4 per cent CAGR at a time when the total return on equity benchmark Nifty 50 was 9.4 per cent.

Over the past decade and half, there have been multiple opportunities in 10-year government bonds or corporate bonds giving investors a chance to lock their investments for a yield as high as 8 per cent. Several debt categories in the same timeframe have delivered an average return of 7.15 per cent to 8.9 per cent CAGR. To be able to take advantage of the opportunities in the debt market, you need to develop quick thinking and develop a smart strategy. While equities will bring in the growth element to the portfolio, debt will provide stability.