With state, Lok Sabha polls ahead, here are some products with low MTM risk: UTI MF

A: As we move closer towards, state and Centre elections, we expect fiscal policies to be loose and monetary policies to be tight which may amount to volatility in interest rates. Hence, we recommend investors to invest in products with low marked to market (MTM) risk. Typically, closed ended products like fixed maturity plans and fixed interval plans suit most investors.

Savvy investors should also make allocations in open ended funds with lesser marked to market (MTM) risk i.e. typically funds which have modified duration (MD) (interest rate sensitive measure) of 2 years or less. Investors who can take some credit risk needs to focus more on maximizing their net yield (YTM minus expense).

Q: Have the latest changes to monetary policy altered the outlook for different categories of debt funds? In the debt fund basket, which category of funds would investors be safer in and potentially earn more this year?

A: The latest monetary policy has broadly been on expected lines hence outlook for most debt funds has not seen much change.

In the near term fixed income return is more of a function of accrual and less of capital appreciation hence funds with low duration risk and higher interest accrual would potential do well this year. If investors has an investment horizon of 1 year or less then they should ideally invest in ultra-short term, low duration and short term categories of fund.

Q: The category has returned sub-optimally (less than 5 percent) in the last 1 year. Can distributors and investors expect returns to go upwards of 7 percent per annum over the next 12-18 months?

A: In last couple of years India's macroeconomic variables have seen abnormal movements on account of demonetization and GST which influenced monetary policy actions from rate cutting to rate hiking. Thus last one years return is a reaction to this abnormal movement more so in long duration debt products.

We do not anticipate such degree of volatility going ahead hence in the next 12-18 months we could see debt funds return going back above 7 percent mark.

Q: How should a retail investor allocate funds for investment in debt? How does it differ from a 30-year-old to a 45-year-old to a 60-year-old?

A: At a time when equity markets are doing really well, how will you convince investors to look at fixed income products? Why is looking at debt products is not such a bad thing especially when the market is trading at record highs?

Historically debt products have given post tax return of 7-8 percent in the medium to long term. They are less volatile in nature than other asset classes. Hence investors need to have some allocation towards these products to provide stability in their overall financial planning.

Typically investor near their retirement age (60 years) have their entire allocation (90-100 percent) towards debt. However a 30 year old who is just about to begin a family could just have 5-10 percent allocation to debt and rest in aggressive asset class. Thus allocation to debt is partly a function of years of service left to retire hence a typical 45 year old investor will have balanced allocation to debt and non-debt products. (Note proportion may vary from depending of level of investor savviness in investing and once amount of disposable income)

Q: In terms of debt funds, what will be the ideal portfolio constitution for investors who have a horizon of 5-7 years?

A: Ideally investors have an investment horizon of 5-7 years should atleast once do a thorough financial planning. Then depending upon his/her risk profile and milestones some allocation should be given to each product category within debt. There isn’t one ideal portfolio constitution for all investors. In the near term higher allocation could be given to products upto 3 years depending on near term headwinds on interest rates.