Debt MFs and The Alternatives

While we all understand that no other asset class, apart from equities, has the potential to unlock superior Alpha, it is equally important to deploy capital in less-riskier asset classes, like Debt, Gold, and so on, as well as part of asset allocation strategy.

One of such moderate-risk and highly popular product structures has been debt mutual funds.

One thing that promoted and lead to the popularity of debt mutual funds was the benefit of indexation.

Broadly, MFs where <35% exposure was into Indian equities (Debt MFs, Gold MFs, International Funds, etc) have been enjoying the indexation benefit attached to them. But, according to the amendments announced by Finance Minister Nirmala Sitharaman in the Lok Sabha session on 24^th March, 2023, that such MFs, as mentioned above, would be taxed at the income tax slab level (wef 1^st April 2023), in much the same way as Bank FDs.

Without indexation benefits, on such MFs, investors will have to pay taxes on their entire capital gains. This will increase investors’ tax liability and lower their post-tax returns, making debt mutual funds less attractive to investors, especially those in higher tax brackets, having a huge debt mutual fund investment portfolios. This is a major impact.

So, what should investors do with regards to their debt mutual fund allocations?

• Existing investments made before the removal of indexation benefits will not be affected, and investors can continue to hold them for as long as they wish.
• With interest rates being high, it may be an opportune time for investors to allocate the debt component of their portfolio to debt mutual funds before 31^st march 2022. Target maturity funds, medium-term debt funds, and gilt funds are some options that investors may consider. SBI AMC, ICICI Pru AMC and Kotak AMC  are three AMCs that offer good options in this regards.
• However, investors need to be more thoughtful while making new investments in debt mutual funds from April 1, 2023 onwards, as the new taxation will be applicable on them. Removal of indexation benefits from debt mutual funds would raise concerns about the attractiveness of debt mutual funds amongst HNI & UHNIs. As a result, for large value investments, Alternative Investment Funds (AIFs) like the credit opportunities funds (Category 2 AIFs) and hedged style of long-short funds (Category 3 AIFs) may become more appealing. Several companies offer funds in this space, such as Tata Asset Management, Avendus Capital, Axis Alternates, ICICI Pru AMC, IIFL Asset Management, ITI, Sundaram Alternates, InCred, Neo, Alta Cura AI, and True Beacon, among others. We have deep insights on all of these and few products are good alternatives to debt mutual funds for  those investors like to make informed investments and aim high risk adjusted performance.

How do we add value?

We at PMS AIF WORLD have a deep understanding of all the funds offered by these AMCs and maintain direct contact with the founders & fund managers.

Our process involves conducting in-depth interviews with the fund management team and analysing the selected funds across five key areas, the 5 Ps: People, Performance, Philosophy, Portfolio, and Price. We also analyse the performance across our proprietary 9 factor model, called the Quality, Risk, and Consistency Analysis (QRC).

All this is aimed at helping investors make well informed investments and achieve high performance.

In case you would like to know more, we welcome you to the insightful experience. To book your appointment with us, click the button below.