Liquidity is an area where debt funds score over other comparable fixed income avenues
THERE is an inherent fascination and thrill of investing in equities that makes it the go-to investment for most investors. Also the fact that equities can appreciate disproportionately over longer time frames makes it ideal for long-term goals like retirement planning or saving for child's education.
The downside of this approach is that other equally significant investment avenues get ignored in the process -like debt funds, for instance. Although debt as an investment category has many takers, it is usually in the form of fixed deposits (FDs) and post-office schemes.
There is another world of debt-laden investment opportunities that investors should not ignore -viz. debt-oriented funds.
As an investment class, debt funds do not get written or spoken about in the same vein as equity funds. Consequently, most retail investors are not familiar with their nuances and the value they can add to the portfolio.
To be sure, debt funds offer benefits that most other products like FDs and post-office schemes may not offer in areas related to liquidity, tenure and posttax returns.
Put together smartly in an investment portfolio with the help of a competent and experienced financial planner, debt funds can add much value and go a long way in fulfilling longterm financial goals of the investor.
Building long-term wealth is a key in achieving lifecycle goals like planning for retirement, buying a house, saving for child's education or marriage. These goals have to be planned carefully and well in advance. The investments that go towards achieving these goals have to be identified in a particular alloca tion. This is how a portfolio is constructed.
Debt funds have a role to play in such portfolios alongside other investments like equities and FDs.
It must be noted that by debt funds we don’t just mean regular debt funds.
There are various opportunities within the debt-oriented gamut of fund offerings. There are hybrid funds like monthly investment plans (MIPs), long-term debt funds like plain vanilla debt funds and gilt funds, medium to long-term funds and short-term or liquid funds. Returns: While it would be impossible and even misleading to comment on returns — many long-term debt funds have generated double-digit returns over the past year or so. As inflation moderates and the RBI begins easing rates, longterm debt funds could be major beneficiaries of this policy. Of course, inflation must first be tamed, which at present looks challenging. So there is likely to be some short-to-medium term pain in terms of rate hikes. Over 12-24 months however, long-term debt funds can be expected to do much better.
Investors can also consider investing in MIPs — which given the equity component — can be expected to generate slightly higher returns over the long-term.
Taxation:
Debt funds also benefit from a helpful taxation policy. If invested over a year, a debt fund investor can take advantage of the indexation benefit. This serves to lower tax incidence significantly – meaning post-tax returns are relatively close to actual gross returns. In other fixed income investments, post-tax returns can be 30 per cent lower than actual returns for investors in the highest tax bracket.
Liquidity is another area where debt funds score over other comparable fixed income avenues.
Allocation:
The allocation of debt funds in the portfolio can be left at the discretion of the financial planner. He will construct the portfolio after factoring in all variables like return, tenure, corpus to be raised towards the financial goal. 
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