By Prateek Mehta
The Covid-19 pandemic has pulled the reins on economic activity across the globe. This has obviously affected performance of financial markets. Most investors can see a notional loss in their portfolios, and some may have even panicked and booked these losses.
It is natural to be fearful during a crisis. There is an evident tussle between emotion and logic, for many experienced investors too! On one hand, seeing your portfolio go into red induces panic, and on the other hand, you know that historically markets have bounced back stronger and rewarded those who have been patient.
Now for those who have decided to stay on track with their investments, the dilemma may persist. Should you shift focus towards debt or equity? While debt investments offer security of capital, the returns are sub-par and may not be able to help you get to your long-term goals. At the same time, equity options will continue to remain volatile for the foreseeable future and it may take some time for businesses to restructure their product/services, recover losses and turn profitable. A choice between the two can be confusing.
However, the introduction of new products such as Principal Protection and Growth (PPG) are aimed at attempting to best protect your principal and mitigate market risks and are essentially a hybrid of debt and index funds that could help you with this concern.
A Principal Protection and Growth (PPG) product can offer 3 distinct benefits
Focused on achieving better returns
The corpus that is parked in debt funds, on most accounts tend to deliver returns that are 20% to 50% higher than traditional debt options such as fixed deposits. While the annualized interest rate on bank deposits have slipped to 4.5% – 5.5%, debt funds are delivering returns between 5.9% – 6.4% (as of July 2020).
The further compounded equity component gives your portfolio an extra edge. Buoyed by positive market sentiment, most of the Index based funds have delivered an average return of 17% over the last three months. Even with annualized returns of about 12% over a five to seven year period, the equity exposure could help fast track your future goals.
Mitigation of risk
As a product, it’s designed to best protect your principal, taking into account any manner in which equity markets fare during economic downturns. It relies on the historical behaviour of asset classes and asset allocation to debt and equity and is designed in a way that’s aiming to achieve a greater probability of the principal being protected than other products in the market.
Investment in mutual funds geared towards PPG awards you the benefit of indexation over the long-term. The Return on Investment (RoI) or capital gains are adjusted basis the cost inflation index (CII) declared by the Central Board of Direct Taxes (CBDT). The minimum holding period to take advantage of indexation is three years for debt funds and one year for equity funds.
This plan provides an alternative to FDs. By staying invested for just three years, you can get indexation benefits on the debt funds – the tax liability gets reduced due to the inflation adjusted cost of asset acquisition. What’s more, it offers tax benefits on the index funds too – there won’t be any tax if the gains are less than Rs.100,000, and even for gains greater than that amount, the tax rate will only be 10%.
Conversely, the tax rate on bank deposits is commensurate with your overall tax slab and can go as high as 30%. Based on the interest earned, you may also be liable to pay tax at source (TDS) on such deposits.
Changing times require a change in investment approach. PPG is a new-age investment product that does the heavy lifting on your behalf. It’s able to derive the best of both worlds – debt and equity, deploying complex algorithmic models and putting thousands of funds through a rigorous filtering process so that your financial goals can be achieved with minimal risks.
Whether you are looking to save up to buy a beautiful home, create an education fund for your children or build a corpus for your sunset years, PPG can be used for every goal and dream.
(The writer is co-founder and CBO, Scripbox.)