Readers of my blog will know that in general, I am not fond of mixing asset classes for the purpose of investments. Even in the 3 portfolio strategy that I have, the investments in Debt, MF and stocks are demarcated and carried out separately. I believe strongly in deciding on an asset allocation and sticking to it through different market cycles.
However, after I gave up my regular corporate career by end 2014, I was dependent on some regular passive income to fund my FI state. While I was still earning a decent active income which could potentially take care of all my expenses, I did not want to depend on it. The cash inflow through my active income from Consultancy is used for any discretionary expenses, investment or for some charitable purposes. Most of my Debt investments were in PPF and FMP with a little in short term debt funds. When the FMP schemes matured, I used the capital gains as my passive income and reinvested the principal for 3 years to take advantage of indexation.
With the reduced interest rate cycle being active, investment in pure debt FMP did not seem like a good idea from 2015. The likely returns reduced a lot and I started looking at options for investment. The obvious choice would have been Balanced Funds but that would have skewed my asset allocation as equity oriented Balanced funds invest nearly 65 % of their assets in stocks. This led me to look a little deeper into the hybrid category of funds. While there can be variations to the theme, most of these fund types have 3 types of investments in their portfolios – Debt, equity and arbitraged equity.
The different types of funds will have these 3 investments in different proportions. Some of the common types with their investment weights are as follows:-
- Dual Advantage FMP which invest in some equity apart from the regular Government papers. The amount of equity will normally be 10-15 %
- Monthly Income Plans which are similar to Dual Advantage FMP except that they are actively managed and declare dividends more frequently.
- Equity Savings Fund which invest equally in Debt, Equity and Arbitraged equity.
- Debt oriented Balanced funds which have about 30 % Equity and the rest in Debt.
- Equity oriented Balanced funds which have about 65 % in Equity, rest in Debt.
In the initial years of 2015 and 2016 I did not have too many FMP maturing as I had rolled over most of these for 3 years due to taxation reasons. Most of the redeemed amounts were put in Balanced Funds and Equity Savings Funds. The advantage of these funds is that you can redeem them after a year without having to pay capital gains taxes. In 2017 I had a lot of FMP maturing – I used the principal amounts to make some investments in MIP and the rest in Dual Advantage plans of FMP. Except for using the money from FMP capital gains, I have not used money from any of the other funds listed here, neither have I touched the interest from PPF or POMIS.
What about returns ? Normally they will be within a range and typical values will be :-
- 12 % – 15 % and more for Balanced Funds.
- 10 % – 12 % for MIP
- 11 % – 13 % for Equity Savings Funds
- 9 % – 11 % for Dual Advantage FMP
- All of the above are of course market dependent and can go lower if market performs poorly.
After this year, most of my investments will cross 3 years and I can then redeem these in a tax efficient manner. The objective of getting some differential return through hybrid funds is being realised now – my audit of investments for last year established that.