Dr Rajesh Mevada writes, “What are debt fund / fixed income options for
non-salaried, self-employed professionals and businessmen? For salaried investors, it is compulsory to contribute to EPF/ VPF, or NPS, which automatically takes care of its debt component. But for non-salaried investors, choosing debt fund investment is a bit difficult. So another relevant question is ‘Why debt / fixed income is difficult, compared to equity?”
PPF seems the obvious replacement for EPF/NPS but has an Rs. 1.5 lakh per year limitation. All investors reading this article would need to invest a lot more in fixed income (and equity) for long-term goals.
The change in debt fund taxation rules from 1st April 2023 has significantly impacted short-term (< 5Y) and medium-term (5-10Y) goal planning. For these goals, a simple recurring or fixed deposit is enough. Arbitrage or equity savings funds will have lower taxes but also carry risk, and their final post-tax return may or may not be better than that of FDs/Rds.
For less than 10Y goals, risk management via regular rebalancing and equity de-risking is not a big priority (relative to long term goals). So we can get away by using FDs and RDs provided we do not chase returns and stick to safe (or too big to fail) banks.
For long term goals, FDs/RDs are not suitable because the instrument should be liquid for rebalancing. We recommend using gilt, corporate bond, or conservative hybrid funds. However, these funds are market linked, so the investor must understand the associated risks.
These funds can go through significant periods with poor returns, and the investor must bear this. Sometimes (if equity has done much better), a shift of assets from equity to these funds may be necessary as per the asset allocation schedule for the goal.
In the coming weeks, we can expect new products like balanced hybrid funds, and depending on their features, they may also be suitable, but it is too early to say.
If you notice, the options for long term goals that allow efficient portfolio risk management are the same for all individuals.
Non-salaried individuals have an opportunity to start with the right asset allocation (say 40-60% equity and the rest in fixed income) for long-term goals, unlike their salaried counterparts whose portfolios are typically EPF- heavy (and in a few cases, NPS-heavy).
This is a blessing in plain sight. How many utilise it, and how many take the bait of guaranteed returns and stay in fixed income is question.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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