Fixed income investment for very long-term
Fixed investment long-term, When your investment horizon is very long, say 20 or 30 years, there is a case for higher allocation to equity.
Fixed investment long-term, Reliance Nivesh Lakshya Fund
When your investment horizon is very long, say 20 or 30 years, there is a case for higher allocation to equity. That apart, fixed income allocation also may be for the very long term, e.g., when allocation to equity is already done, or fixed income is the mandate. How to do it? Let us look at the options that are safe, i.e., of good credit quality.
There are perpetual bonds available (non-Banks), but there the only way to encash it is to sell in the secondary market, which may be uncertain, and credit rating is less than AAA.
Tax-free PSU bonds where the longest maturity was 20 years when issued, are now less than 20 years as there are no fresh issuances over the last couple of years. Tax free bonds are issued by AAA rated PSUs. You can hold them till maturity, or sell them in the secondary market;
Public Provident Fund (PPF), which offers tax-free interest but has a limit of `1.5 lakh per year. PPF has a tenure of 15 years, extendable in blocks of five years. Liquidity is an issue, at least in the initial years of the scheme.
Apart from these, other safe fixed income avenues, like bank deposits, RBI taxable bonds or Post Office deposits are available, but these do not have that long a tenure.
The other option is to buy government securities, which are available in long maturities, e.g., 30 years or more. G-Secs are the best credit, perceived to be better than AAA rated bonds. However, there are certain practical limitations of buying G-Secs directly. The G-Secs market is wholesale, where trades happen in very large lot sizes, out of reach for the common investor.
The better option is to purchase it through the mutual fund route, where you can invest in any size, starting at `5,000. The option of a very long maturity G-Sec was not available so far, which is there now. Reliance Nivesh Lakshya Fund, which is available as an NFO from June 18-July 2, is an open ended debt fund where they will purchase very long maturity G-Secs, say, of 30-year maturity.
There are certain advantages of investing through the mutual fund route instead of buying G-Secs directly. Tax efficiency is one. When you buy a G-Sec yourself, the interest is taxable at your marginal slab rate, which is 30% for most investors. In debt mutual funds, growth option, for a holding period of more than 3 years, the taxation is at 20% after the benefit of indexation. Indexation reduces your tax quantum significantly, hence the effective tax incidence is that much lower. Indexation is the benefit given by the government, while computing your long term capital gains (LTCG) tax, to account for inflation. Moreover, it is cumbersome and costly for you to manage the fund management and operational aspects of investing in G-Secs directly.
In the fund mentioned above, the maturity of the portfolio will be rolled down. Let us say the fund manager purchases a G-Sec maturing in 2051, i.e., 33 years from now. With every passing year, the remaining maturity of the instrument will become one year less. The advantage of maturity roll down is that the market risk in bonds comes down along with residual maturity, so that eventually the investor gets the return initially contracted.
Tax-free PSU bonds are available at yields of 6.25-6.5%, which is the tax-free return you will get if you hold till maturity. In PPF, you get a tax-exempt return of 7.6%, which is the best. In the mutual fund mentioned above, assuming a return of more than 8% on the portfolio, net of fund recurring expenses and long term capital gains tax, a return of more than 7% may be expected.
Source- Financial Express , Google.
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