Wealth managers are busy making the most of the small window till 31 March 2023 to deploy money into debt funds and avail the benefit of indexation. Even as these wealth managers are busy conducting webinars and conference calls with their clients, Moneycontrol asked some of them for their views. Here is what they are advising their high net worth individual (HNI) clients.
Stick to deadline
The change in taxation rules mandates that gains on purchase of units of mutual fund (MF) schemes with less than 35 percent equity on or after 1 April 2023, will be taxed as per the slab rate. There won’t be any indexation benefit. However, units bought till 31 March 2023 continue to enjoy indexation benefit. So, for investors with a minimum three years’ view, there is still scope to lock in their money and enjoy tax-efficient returns. Gains earned on sale of such units held for three years and more will get taxed at 20 percent post indexation.
Wealth managers and distributors catering to big-ticket investors are conducting webinars and conference calls with their clients to educate them about this window of opportunity. To be sure most retail investors are yet to warm up to debt funds. Most debt fund investments are from investors in higher tax slabs or those keen on compounding their money in low-risk avenues for longer tenures.
Ashish Shanker, Managing Director (MD) & Chief Executive Officer (CEO), Motilal Oswal Private Wealth, asks investors to review their existing portfolios and take corrective action, wherever necessary. “If you are invested in a low-yield scheme, it is good to switch to a high-yield one, if your financial goals permit. Complete all your debt fund investments before 31 March and then let the money compound as long as you can,” he says. He recommends investments in a dynamic bond fund or a medium-duration debt fund offering the roll-down strategy, provided you have a minimum three-year time-frame. “You can break your existing fixed deposits or use money lying in liquid funds or other instruments to fund this purchase,” he adds.
Are open-ended schemes back?
For the last couple of years, many distributors, wealth managers and even fund houses were positive on investing in target maturity funds (TMFs). But the change in taxation rules have made many change their view and look at open-ended actively-managed debt schemes. The possibility of the interest rate hike cycle peaking and the need to stay invested for longer to avail of indexation benefit make advisors look at open-ended funds.
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Amit Bivalkar, MD and CEO, Sapient Wealth Advisors & Brokers, is of the opinion that allocating money to banking and PSU debt funds and dynamic bond funds make sense. While the former is seen as an allocation to relatively high-quality bonds, the later mandates the fund manager to alter the duration of the portfolio based on relative attractiveness from time to time. “These schemes can be good vehicles for long-term fixed income investments. Choosing open-ended debt funds can help investors defer their tax liability as long as they hold on to their investments,” he says.
Open-ended schemes can help investors redeploy money from time to time, and compound it. Fund managers can construct portfolios that help ride out the interest rate cycle, especially in dynamic bond funds. Wealth managers are also focusing on merging the twin drivers of profit in fixed income – high yields and possible downward movement in interest rates.
Nitin Rao, CEO, InCred Wealth, expects interest rates to go up by 25 basis points (bps) in the next three months, and then, start inching downwards after one year. He anticipates interest rates to come down by 100-125 bps in three years. “A combination portfolio of well-managed accrual-focused schemes with 80 percent allocation and rest to long duration funds should beat the returns given by TMFs over a three-year period,” he says.
TMFs are still not out
Though there is a clear tilt towards open-ended funds, some wealth managers prefer to play it safe with TMFs. Since TMFs invest in a mix of high-quality bonds in line with the underlying index, there is little scope for fund managers to select securities or to decide the portfolio construct. The low costs charged by fund houses make these schemes a compelling buy.
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Though a few distributors want to point out that the maturity of TMFs leading to redemption of units leads to crystalisation of the tax liability for the investor, open-ended debt schemes may not be the best bets at this juncture when the global economy is slowing down and large financial institutions in developed markets are under pressure.
Feroze Azeez, Deputy CEO, Anand Rathi Wealth, tells investors to check the credit quality of the portfolios and the expense ratio of the debt schemes. “Schemes with allocation to AT1 bonds and other low-rated bonds should be avoided. TMFs with exposure to government securities look good, as they offer better yields net of expenses compared to many actively-managed debt schemes with similar duration,” he says.
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He is not alone. Ahmedabad-based Ashish Shah, founder of Wealth First Portfolio Managers, likes TMFs due to the absence of fund manager risk and low cost. “Investors with an investment horizon of a minimum three years and a clear understanding of duration risk, should look at investing in TMFs maturing in 2032-2033. If interest rates come down over the next three years, then they will be sitting on decent gains,” he says. Holding on to this position for nine-10 years, will ensure that indexation benefit trims the tax liability to the minimum, he adds.
What should you do?
Though wealth managers have carved out strategies for their big clients, you should not blindly follow them. Ideally, you should invest in a product if your financial goals and future cash flow needs permit you to do so. Invest in a scheme the duration of which matches your investment time-frame.
Recently, investors in Bharat Bond ETF 2023 are offered the option to merge their holdings into Bharat Bond ETF 2025 as the former approached the date of maturity. This ensured postponing tax liability along with continuous compounding for the investors. However, going forward there is no assurance that all other TMFs will go this way. Current estimates of future returns and strategies are built around current portfolio yields and expenses, which can change over a period of time. Investors need to take cognizance of the dynamic nature of the financial market and debt schemes. Hence, instead of taking investment decisions based on external factors it makes a lot of sense to give utmost importance to your risk profile and financial goals while investing.