For first-time investors, it makes sense to start with SIPs in both debt and equity funds
The bad news for investors just keeps coming. Just as we were settling down after the March 2020 carnage in the equity markets, we had Franklin Templeton winding up six of its debt schemes. In the interim, interest rates on bank fixed deposits (FD) and small savings also went south. Impending pay cuts or, worse, job losses, across sectors aren’t helping our money matters. But that does not mean you should sit on cash.
Should you sell your debt funds?
Franklin Templeton’s move spooked investors. But do not dump your debt funds in panic. First, you might end up paying exit loads and taxes, unnecessarily. Second, look at your debt fund closely, its mandate and why you invested in it.
“Not all bond funds chase returns by taking high credit risk. Well-managed bond funds investing in bonds with high credit rating can be held on to,” says Sayalee Khandke, Manager Research, Investica. Though interest rates have already fallen and probably may decline a bit more, a carefully crafted fixed income portfolio can help you achieve short-term goals due in the next three years with less volatility.
“Investments in short-term bond funds investing in good quality papers are still attractive,” says Vishal Dhawan, founder and chief financial planner at Plan Ahead Wealth Advisors. Match your investment time frame with bond funds’ investment time frames (modified duration). For example, if you have a six-month time frame, stick to ultra-short term bond funds; for a time frame of three years, a short term debt fund can be considered. Steer clear of credit risk funds and long-term gilt schemes.
Banking PSU Bond funds also make sense for relatively conservative investors with a three to four-year time frame. For investors in the higher income tax brackets, tax-free bonds are good investment avenues, provided they can buy them online and hold till maturity.
For those in the lower slabs, the 7.75 per cent RBI taxable bonds are a good option.
For those who want absolute safety, bank fixed deposits may be suitable, though interest rates are low .
Equities are at a discount
We buy so many things when there is a discount. Why should equities be any different? After the 26 per cent fall in markets since the beginning of the year, this is the time to allocate some more money to equity. If you plan to save for a goal that is five or more years away, equity funds are still good options.
“Avoid investing in small cap funds for the time being, as small-sized companies are expected to get hit more due to the COVID-19 induced slowdown compared to their larger counterparts,” says Gautam Kalia, head-investment products, Sharekhan. He recommends staggered investments in multi-cap funds and large and mid-cap schemes for equity allocation.
“In a bear market such as the one we are into now, large-caps are first to recover,” observes Amol Joshi, founder of PlanRupee Investment Services. He advises sticking to large and multi-cap funds.
Once you are sufficiently invested in Indian equities, “do consider international equity funds as well,” says Dhawan.
Whatever asset allocation you choose, at least two years before the financial goal is due, shift into fixed income from equity.
Asset allocation helps generate healthy risk-adjusted returns by allocating funds stocks, bonds and gold by taking into account one’s financial goals, risk tolerance and investment horizon.
“Check if your current asset allocation has deviated from the one you started with, because of the fall in equities. This can be the right time to rebalance it,” says Amol Joshi.
For first-time investors, it makes sense to start with systematic investment plans in both debt schemes and equity funds with good track records. Avoid going all out as volatility is expected to persist.
SIPs: To stop or to continue
Your SIPs are designed to buy more units in falling markets and less units in rising markets. It’s in these declining markets that you actually end up buying more. Don’t stop your SIPs just because markets have fallen.
But reassess them if you face an income loss. Rising health risk and the possibility of salary cuts or job losses are threats to your finances. Instead of stopping your investments, you can pause your SIPs for a few months, till such time as your normal cashflows are restored.