The debt fund market was rattled last week due to policy action taken by the central bank. Monika Halan, editor, Mint Money, and Vivek Law, editor, Bloomberg TV India, in their weekly show Smart Money, decode what exactly happened. Edited excerpts:
Vivek: The Rs.6 trillion debt fund market panicked following the central bank’s move. The net asset values (NAVs) of gilt and income funds dropped by more than two percentage points and some funds lost as much as four percentage points in a single day. With plunging returns, is it time for you to start panicking?
Monika: A lot of things went wrong. But when things like these happen, it brings home the risk of market-linked products. The minute you are linking something to the market there is a risk in the investment. We need to remember that these are not fixed deposits. Also, we’ve been saying that debt funds are complicated products—you need to understand them very well before investing. So let’s quickly understand what really went wrong.
Expectations have been built up that interest rates are coming off. When interest rates fall, bond prices rise and people make a killing on capital appreciation in a debt fund. The last time interest rates had come off, debt funds had given 20-25% returns in a year. There has been a push from funds and advisers to get people to time the market and put money in debt funds this year. But market timing is not for retail investors. It is only for speculators and treasury managers. So, if you have not substituted debt funds for equity funds, then you are not in trouble. It is only the long-term money that has got caught in a short-term blip which is at risk. So if you have done your asset allocation well and stuck to it—you have got debt funds going with particular goals in mind, the ultra-short term for periods of up to six months, short-term debt funds for periods up to two years and the long-term bond funds for longer tenors—you are fine.
Again when something like this happens, the boring old rules of financial planning work. We say do not put all your money in one fund house or one scheme—diversify.
Vivek: Rajesh is on call. What would you like to know about your money?
Rajesh: I have two queries. Is my investment in the right direction and do I need to discontinue or do something new? I have about Rs.30,000 which I can invest. I want to know where can I put this money?
Monika: Rajesh, you are doing well. I think you know that you have got a very high savings ratio. Your household is debt free. Your parents are independent. You have got a large emergency fund, provident fund and Public Provident Fund.
But you have got nine life insurance policies. You have an annual premium of Rs.7 lakh and your cover is only Rs.1 crore.
You should reduce the money in your savings deposits—it’s only earning 4% return. Link it to a fixed deposit so that at least it earns marginally more interest and if this is emergency money, put it away in a longer tenor fixed deposit. Also, you need your own mediclaim.
For insurances, I will give you broad suggestions. You should let go off all the money-back and endowment plans. For unit-linked insurance plans, you should see what particular fund you are invested in because each company will have different funds and different returns. And buy a term cover for Rs.2-2.5 crore which will not cost you more than Rs.25,000 a year.
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