Wealth preservation in fashion during Covid-19

New Delhi: The Covid-19 outbreak has led to a low interest environment and as a result top financial planners are seeing an interesting shift in the way investors hold their long-term wealth. If data is an indicator, the rich are moving away from conspicuous consumption and focusing on long term preservation of wealth. There has been a strong movement away from fixed deposits due to low interest rates with the rich looking for safer avenues of investments and decent returns.
Take the Nivesh Lakshya Fund of Nippon India Mutual Fund, for instance. The assets under management of the fund has grown from close to Rs 762 crore just before the outbreak of the pandemic at the end of February to Rs 1,307 crore by the end of May. That’s a 72% increase during the Covid-19 period. In fact, independent mutual fund analysts said such funds have caught the fancy of investors due to their performance.
“The smarter investors are surely moving towards pure debt funds. With interest rates falling, any good financial advisor will suggest the same. The problem is that a vast majority of retail investors are either still invested in fixed deposits or are choosing the wrong debt fund. Unfortunately, the retail market thinks of debt funds as one size fits all product,” said Rajat Sharma, CEO of Sana Securities, which also caters to HNI investors.
“In reality, debt funds that invest in G-Secs can be safer than FDs and generate higher returns if you hold them at least for as long as their average maturities. Further, debt fund returns are higher than FDs but not linear; and hence, investors should come in only if they have a longer-term view. This is what separates FDs from debt funds,” he said.
So, which are these funds? While for short term investors with a horizon for five years, funds, such as the L&T Triple Ace Bond Fund are attractive, investors with a slightly longer eight-year forecast are opting for the Axis Dynamic Bond Fund.
The reason for this sudden shift towards safer and more lucrative investment instruments is explained well by renowned personal finance expert, Gaurav Mashruwala, who gives an interesting perspective.
“We have been telling our clients that if you feel that there is a likelihood of some turbulence coming in due to external factors like Covid-19, then appropriate action has to be taken although I have not seen much shift in the portfolio of my clients,” said Mashruwala. “But investors must look at their internal conditions and plan their finances accordingly. Big or small, investors must do contingency planning to help create long term wealth.”
So, does this ‘rolling-down of G-secs’ strategy work? The fund invests your money in long term (25-year) G-secs and holds them till maturity. These papers are available at attractive yields currently. And given the low-interest rate regime, they provide capital gains every time RBI drops interest rates. Add to that the tax benefit (indexation benefit) after three years of holding, and you may have a good fund in your hands.
“I notice that older clients, particularly those who are 50 plus, focused more on preservation of wealth and on tax efficiency,” said Sharma. “Several HNI/ UHNIs who I speak with have seen interest rates going down over the years and are looking at alternatives to instruments like FD/ Tax-free bonds. The early adopters have realized the attractiveness of locking in current higher interest rate for a longer period to preserve wealth without taking any market linked risks. This is made possible when you buy sovereign rated instruments and hold till maturity.”