Diversified debt mutual funds better deal

Do you think the concept of a diversified portfolio applies only to equity investors? Well, it is time to think different. According to financial experts, investors would do well if they diversify their debt mutual fund (MF) portfolio into liquid, income and gilt schemes.
‘‘There is clear indication that investors have to look at another class of funds other than liquid scheme,'' says Y Jawahar, V-P & head of distribution, Mata Securities. ‘‘A combination of 30-40% liquid scheme, 30% each in income and gilt schemes would serve them better.'
However, he quickly adds that unlike in a liquid scheme investors can't park money with a short-term investment horizon in an income or gilt scheme. ‘‘One should have a time horizon of one year or more to invest in an income or gilt scheme,'' he says. However, investment tenure is not the only factor that should determine the investment decision in these schemes.

One should always have a clear view on interest rate movement and risks associated with each scheme before parking money. For example, gilt funds, as the name denotes, invest mostly in government securities and carry little credit risk. Income schemes, on the other, are riskier as they invest in corporate bonds, which carry more credit risk.
‘‘Investors, who believe interest rates will go down further and don't want to take any credit risk should go for a gilt scheme,'' says Mukesh Dedhia, director, Ghalla & Bhansali Securities. ‘‘If you have a very competent fund manager who can excel during volatility, you can earn very good returns from gilt schemes.'' If you are ready for the plunge, you can hope to earn around 9-10% from a gilt scheme.

If you have a little more stomach for risk, you can opt for an income scheme.
‘‘The spread (interest rate difference) between corporate and government bonds have widened considerably. There is scope for contraction and that could enhance returns from income schemes,'' says Dedhia.
You can expect to pocket returns around 11-13% from an income scheme. Now, would you still be happy to keep the money in a liquid scheme and earn around 7%? Well, consider the above factors and take a call.