Company FD or debt fund?

By Morningstar |  19-11-19 | 
 

We believe that investors should consult with a financial adviser before investing. What we offer are just broad suggestions.

You can read our analysts’ views on various funds here.

I want to invest approximately Rs 3-5 lakh for 3 years. I am in the 10% tax bracket. Should it be in a company fixed deposit or debt mutual fund?

- Vijay

From a diversification perspective, investing in a single company fixed deposit is risky as it subjects the investor to the default risk of a single issuer (the company). On the contrary, an investment into mutual funds offers exposure to multiple issuers thereby reducing the default risk of the portfolio, Also, mutual funds are managed by investment professionals who use their research facilities combined with their investment expertise before making any investment.

From a taxation perspective, interest income proceeds from company fixed deposits are subject to tax each year at the marginal tax rate applicable to an investor. On the other hand, mutual funds offer better post-tax return potential owing to indexation benefits.

Given the current credit scenario, one should invest into debt schemes with high credit quality - Banking & PSU funds and Corporate bond funds.

Can an NRI invest in an Indian mutual fund in USD?

- Pulkit

NRIs can invest in mutual funds in India as long as they adhere to the Foreign Exchange Management Act (FEMA). However, not all Indian mutual funds accept NRI investments.

Mutual funds in India are not allowed to accept investments in foreign currency. For investing in Indian mutual funds, an NRI needs to open one of the following three bank accounts viz. an NRE (non-resident external rupee) account, an NRO (non-resident ordinary rupee) account or FCNR (foreign currency non-resident) account with an Indian bank.

I recently started investing in L&T Midcap and Kotak Standard Multicap Fund. I am a moderate risk taker and can stay invested for a minimum of 10 years. Does my portfolio require some adjustment/reshuffling?

- Samit

For portfolio construction, asset allocation-based approach (mix of equity and debt) should be followed as it is one of the key determinants of the portfolio’s performance, in terms of risk & return. Higher the investment horizon and risk appetite, higher can be the allocation to riskier asset classes such as equity which has the potential to deliver relatively higher returns compared to fixed income over the long term.

Given the moderate risk appetite, and no information on existing investments; the current allocation (entirely into equities) is misaligned with your risk appetite. Your portfolio should have an asset allocation mix of about 55% into equities and 45% into fixed income funds with a high credit quality. The equity allocation of 55% can be split up as 40% into large-caps, 8% into mid-caps and 7% into international equities. The international equity allocation offers diversification across geographies and a hedge against currency risk.

Both Kotak Standard Multicap (managed almost like a large-cap scheme) and L&T Midcap (providing exposure to mid-cap segment) serve the recommended sub-asset class needs of the portfolio and have exhibited consistent performance over the years. Ensure the investments into these funds are in the recommended proportion. If the corpus being invested regularly is large, you can look to diversify across 2 or 3 funds.

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