Debt funds good investment options in volatile mkt: Expert

Excerpts from Markets Midday on CNBC-TV18 Watch the full show »

Hemant Rustagi of Wiseinvest Advisors spoke to CNBC-TV18 about debt funds and investment options available on that front. Watch out for his comments. 

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: What are debt-oriented hybrid funds? How are they different from debt funds?

A: There are quite a few options which are available in the pure debt funds. We have these liquid funds and ultra short-term funds which are essentially meant for parking money for a short-term. For example, when you invest in a liquid fund, you would invest with a time horizon up to three months; ultra short-term will be less than three-six months; and then you have short-term debt funds wherein your time horizon should be at least 12-15 months. The difference here is that maturity duration of these funds is not really long. So they are less volatile. We can say they are safer compared to a typical income fund or debt fund, as they are called, where the maturity duration could go as high as six-seven years. So those can be volatile because they get more impacted by interest rate movement.

In the debt space, there is lot of options available to the investor. When I talk about debt-oriented hybrid fund, as the name is hybrid fund which means that there is some portion invested in equity, the whole idea is that someone who is looking to have some exposure in equity but wants to cap it to 15-20% should be invested in these debt-oriented hybrid funds. 80-85% money goes into debt which means that majority of the money goes into safer instruments and 15-20% goes into equity. So even if the markets are volatile, the chances are that you will not lose your money or capital.

Q: Can you give us some examples of a debt hybrid fund in the market that an investor who wants to make Rs 5 lakh in three years can invest in?

A: There are different varieties, but for someone like him, I think it's monthly income plan as I mentioned. He can consider HDFC MIP long-term or Reliance MIP. These MIPs typically have two options, one is the dividend option which is essentially meant for investors as the name suggests looking for regular income, and cumulative or the growth option for people who want to have restricted exposure to equity but want their money to grow over a period of time. So he can go for growth option here. Only Rs 3,000 one scheme should be alright. HDFC MIP long-term is a fund that he can consider.

Q: You say that a six-month monthly expense pool should be created. Should that be in cash? Should it be in one of those liquid funds you spoke about or should it be in FDs? How should that money be kept aside?

A: The first priority has to be that it has to be liquid. The whole purpose is that it should be available to me whenever there is an emergency or I require it. So clearly, the instrument has to be absolutely liquid. The second, does it make sense that while you have created a reserve for six months expenses, it is not necessary that you may actually require it. You may not require it for next one-three years. So obviously, the focus has to be on the instrument where you will get higher returns like traditional options like you have saving bank account plus it also has to be tax efficient. So if you look at these two factors, as you rightly said, he can look at ultra short-term debt funds, not the liquid funds. He can look at ultra short-term debt funds where he can expect to get more than what he is going to get in the saving banks account. The second is the returns are more tax efficient because even if he doesn't withdraw for a year or so then the long-term capital gain is going to be only at 10% and he will also get the benefit of indexation. So I think look at two factors where you can get more returns without compromising your liquidity and also the returns should be tax efficient.