“The 10-year bond yield in India has moved up to 7.35% from 7.0% in May 2023. Given the geopolitical tensions, large institutions are expecting further hardening of yields which is keeping them on the sidelines. Shorter duration funds (< 1 year) continue attracting much interest. FDs (6 months to 3 years) are in demand among the large institutions as against these, Line of Credit is also available that makes it an attractive proposition,” said the brokerage in a note.
Source: MOFSL, RBI
“The tax treatment of FDs and debt funds is broadly the same, albeit with a slight twist. Your interest income is added to the annual income and then taxed as per your tax slab. In simple terms, if you earn Rs 1 lakh in interest from either FD or debt fund that money is added to your annual income and then taxed according to your tax regime’s rate,” said Satyajit Sen of Value Research.
Sen further explains that the one major difference is that the FD interest income is taxed every year. For instance, if it’s a five-year FD, the interest you earn will be taxed on five separate occasions.
That’s not the case with debt funds, such as liquid or short-duration funds. You are taxed only once when you withdraw your investment.
“The median interest rate of a three-year FD in small finance banks is 7.98 per cent. It’s 0.5 per cent higher for senior citizens. On the other hand, short-duration debt funds, on average, are likely to yield 7.14 per cent, while a middle-of-the-road liquid fund delivered 6.63 per cent returns. So, if you invested Rs 4 lakh in a small finance bank FD for three years, your post-tax returns would amount to Rs 4.72 lakh after three years. (For senior citizens, it’s Rs 4.77 lakh). Similarly, if you invested the same amount in a short-duration debt fund, your post-tax returns would be Rs 4.64 lakh. It would be Rs 4.59 lakh for a liquid fund,” as per the Value Research calculation.
Some demand is arising for floating-rate funds but this is a much smaller category in the overall debt segment. Debt index funds, which had witnessed strong momentum over the past few quarters have also seen a reduction in inflows.
Also Read : NFO Review: Should you invest in the newly launched Parag Parikh Arbitrage Fund?
Retail customers still elusive to the passive space
There has been a significant increase in product launches on the passive side. However, retail segment investments via distributors are not moving towards these products, noted Motilal Oswal.
However, HNI investors are incrementally using the passive route, especially through the wealth management platforms, which allow them to invest under the direct route. Under the advisory route, these assets still garner income for the wealth managers.
On the equity side, During October 2023, there has been some pressure on gross flows owing to the Shraddha Paksha period. Further, with festival season around the corner, the demand for consumption will eat into incremental savings. This is expected to revive post-Diwali.
SIP momentum, however, has continued to remain strong and the penetration is intensifying in lower-tier cities. SIP ticket sizes have also been moving higher in the smaller towns and cities. Almost 95% of SIPs in terms of count are in the equity segment.
Within the equity segment, demand for small-cap funds has been the strongest. However, with lumpsum flows being stopped in a few large schemes, there has been an unaddressed demand, which would resurface if and when the lumpsum
investments are accepted again.
The momentum of HNI money shifting to alternates continues to pick up pace with the launch of new AIFs and PMS schemes.