Pankaaj Maalde
Financial Planning can be described as “ Long Term Process of wisely managing your finances so that you can achieve your Goals & Dreams.” There’s an old saying that “failure to plan, is a plan to failure”. Without a financial plan, it’s like starting on a journey without knowing your destination. Personal financial planning is a process - an organized, well-planned course of action for strategically managing your finances to achieve your life goals.Planning leads to happiness.
Monday 4 April 2022
Tuesday 8 March 2022
Thursday 10 February 2022
Bank FDs score over Debt funds
Interest rates are all set to rise. Central banks across globe are facing pressure of high inflation. US have inflation of 7% which is at 40 years high and Europe on the hand has 5% inflation which is at 30 years high. As crude is near 90$ a barrel we also have to face the higher inflation. Federal Reserve signalled a rate hike in coming March. Government borrowings will go up after high capex is announced in the budget 2022.
Debt funds of mutual
fund gave better returns till last 6-8 months but as the rates are likely to go
up the debt will not give better returns. The duration play is over. 10 year
gilt is trading above 0.80 paise than coupon rate. Long duration and medium
term bonds may give negative or very low returns. Investors must know that the
bond prices drops when rates go up.
Now it’s time to
evaluate the debt investment in the current scenario. Last one year’s returns
of debt mutual fund investment has fallen below the fixed deposit rates. The
average 1 year return of regular plans in liquid and money market fund is below
3.50%. The average 1 year return of low duration and short term fund is below
4%. The average 1 year return of corporate bond and gilt fund is below 4% The charges are also high which reduces
overall return. In MF debt funds net returns are gained after you minus
expenses from YTM (Yield till maturity). The returns are also subject to credit
and duration risk which most investors fail to understand.
On the other hand the
fixed deposits rates are around 5/5.50% in bigger banks. Safe corporate
deposits of AAA rated co. offers around 6/6.50% p.a. return. The senior
citizens also get 0.25% or 0.50% higher in fixed deposits which are not
available in debt fund investments. Recently government increased the limit of
insurance for bank deposits from Rs. 2 lakhs to Rs. 5 lakhs also gives
advantage to banks fixed deposits.
Mutual funds must
relook high expense in debt products given current unfavourable conditions and
make debt products more competitive. Debt funds are unlikely to beat fixed
deposits rates going forward. The tax treatment is same both in FD and MF if
you invest for less than 3 years time horizon.