This is because traditionally investors come with some knowledge of savings bank accounts, bank fixed deposits, post office deposits etc. Since liquid funds and other debt funds give returns similar or superior to those traditional investments, and also carry risks which could be equated with those instruments, it is logical to introduce investors in to mutual funds through the debt market route. Once they get a taste of liquid funds and understand the advantages and disadvantages of these schemes, for them the next step should be to invest in short term funds. After that they should invest in income funds and then in balanced funds, the latter a mix of debt and equity. Only after they understand the working of debt funds and partially of equity funds, investor should invest in diversified equity funds and other equity schemes. And even when they know about equity funds, a part of their corpus should be in debt funds.
The crucial issue here is that every investor should have some amount of their investments in debt funds and some in equities. So the question is how to determine the mix between debt and equity for an investor. The simplest thumb rule is that the percentage equal to your age should be invested in debt instruments. So if your age is 30 years, 30% of your corpus should be in debt instruments, including debt funds. Seen another way, 100 minus your age should be the ratio of your investments in equities. However, financial planners and advisers say that this is the basic rule but the actual mix between debt and equity investments may vary when one considers other factors like risk taking ability of the investor, number of dependents, the quantum of investments compared to the family monthly investments, the nature of goals one is investing for etc.
Although debt funds are relatively safer investments than equity funds, but financial planners and advisers say that before investing in these funds, investors should look at tax implications for every such investment and also compatibility to one's risk taking ability. Also there are two related issues to keep in mind: Price risk and reinvestment risks.
Price risk is in case there is a downgrade or a rise in the rate of interest in the economy, the price of the debt instrument will fall, leading to a loss in the portfolio.
Re-investment risk is the risk of getting a lower rate of interest when the cur rent investments mature and you need to re-invest the same.
So investors should keep in mind that higher gains in debt funds depend inversely on the rise and fall of the interest rate in the economy. In case you are investing in a falling interest rate scenario, you tend to gain from interest income as well as capital gains. However, in case of a rising interest rate scenario, your gains could be limited by some capital loss.
Another point to remember is that returns in debt funds are usually either equal to or just a tad higher than the rate of interest and rate of inflation in the economy. On the other hand, investing through equities, which carries risks higher than debt investments, could give you returns which are inflation-plus in nature. This is true for long term investing through the equity fund route. The logic here is historically it has been seen that most well managed, large companies have clocked growth which is much higher than the rate of inflation. This in turn has pushed up the prices of their stocks more than the rate of inflation. Hence the returns from equities and well-managed equity funds have been more than the rate of inflation.
For a well-diversified portfolio that will not give you sleepless nights thinking about returns, an investor should have a judicious mix of debt and equity in his portfolio.
Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015
1.ICICI Prudential Tax Plan
2.Reliance Tax Saver (ELSS) Fund
3.HDFC TaxSaver
4.DSP BlackRock Tax Saver Fund
5.Religare Tax Plan
6.Franklin India TaxShield
7.Canara Robeco Equity Tax Saver
8.IDFC Tax Advantage (ELSS) Fund
9.Axis Tax Saver Fund
10.BNP Paribas Long Term Equity Fund
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