The most basic, and safe, returns on investments are those derived from liquid funds, or returns from fixed income funds that are of good credit quality. While asset classes such as equities provide better returns, there are ways that conservative investors can enhance their basic returns without taking too much of the incremental risk.
The current corporate credit environment is relatively better than earlier. There are now more credit rating upgrades by rating agencies than downgrades. Corporate balance sheets, too, are less leveraged; most companies did a good job of deleveraging during the covid pandemic. There are bonds and debentures rated lower than AAA, say AA or A, but are of somewhat good quality. One way to invest in these is through credit risk funds of mutual funds. However, the expenses charged for credit risk funds are usually higher, which would take away from the higher returns that one gets from the papers that are rated AA or lower.
If your investment ticket size is ₹50 lakh or higher, you can opt for the fixed income strategies offered by portfolio management services (PMS) of asset management companies with a proven track record. Do make sure that the recurring expenses are reasonable. If your investment ticket size is lower, you can purchase bonds directly from the primary or secondary market. You can get into secondary market bond deals as the client of a bond dealing house or buy through online bond provider platforms (OBPPs). However, the issuing entity should be reliable where the bonds are rated lower than AAA, since you are taking a credit risk.
It is advisable to have a proper allocation to equity, fixed income and other asset categories. If you are a conservative investor, depending on your investment time horizon, you can have a limited equity exposure, say up to 25%. There are conservative hybrid funds of mutual funds with 10-25% of the portfolio being invested in equities. This would ensure discipline on the equity exposure, as it would be within the defined range and is managed by the fund manager. However, being classified as debt funds, these are taxed as short-term capital gains, at your marginal slab rate, irrespective of the holding period. If you invest the 20-25% in pure play equity funds, it would be taxed at 10% for holding period of one year and longer, for gains beyond ₹1 lakh per financial year. You can also decide which category of stocks you prefer, e.g. large-caps, small-caps, etc.
In times of geo-political tensions, and generally as a portfolio diversifier, gold comes handy. While there are multiple ways of investing in gold, sovereign gold bonds (SGBs) offer certain advantages. There is an interest of 2.5% per year, over and above gold price appreciation, provided you hold it till maturity, SGBs are free of tax as well. Liquidity of SGB is something you have to take care of. Allocation to gold should be, say, 10-15% of your portfolio, and not a major chunk, as it is more of a portfolio diversifier and not a staple investment asset. Hence, the lack of liquidity in SGBs, which forms a small part of the portfolio, should not be an issue; it is advisable to hold this till maturity.
Arbitrage funds are defined as equity funds. However, there is no directional call on equities, i.e. returns from arbitrage funds do not depend on equity stock prices going up. The spread between the cash or spot segment of the equity market and the stock futures market is captured through these funds. The spread between buy position in cash market, and contra position in stock futures market, is locked in, one month at a time. From this perspective, it is comparable to fixed income funds. Up to 35% of the fund should be kept in money market or debt instruments. The advantage of arbitrage funds from the investors’ perspective is taxation. In the growth option of the fund, for a holding period of more than one year, the tax rate is 10%. The differential in net-of-tax returns with debt funds has become even more pronounced, since the indexation benefit has been taken away from debt funds with effect from 1 April. You can earn higher net-of-tax return from a fund category that is comparable to fixed income, depending on your tax bracket.
Your portfolio construct is a function of your investment objectives and risk appetite. This is for conservative investors looking for a notch higher than plain vanilla fixed income.
Joydeep Sen is a corporate trainer (financial markets) and an author.
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Updated: 28 Nov 2023, 10:33 PM IST