Should you invest in debt funds to create a retirement corpus?

I have suggested investing in mutual funds to my son for building his retirement corpus. He can comfortably invest at least 20,000 per month in mutual funds. Also, please suggest whether he should invest in debt funds for the purpose.

– Name withheld on request

(Query answered by Naveen Kukreja – CEO& Co-founder,

Equities as an asset class outperform both inflation as well as fixed income instruments by a wide margin over the long term. So, I would recommend your son to invest in equity mutual funds, not in debt funds, for building his retirement corpus. He can distribute his monthly investible surplus equally through SIPs in direct plans of: HDFC Index Sensex Fund; Mirae Asset Large Cap Fund or Axis Bluechip; Axis Midcap Fund or PGIM India Midcap Opportunities Fund; Parag Parikh Flexi Cap Fund or PGIM India Flexi Cap Fund. If he has the scope of saving taxes under Section 80C, then he can invest in direct plans of Axis Long Term Equity Fund and/or Mirae Asset Tax Saver Fund through SIP.

As equities can be volatile in the short term, he can invest in fixed income instruments like debt funds or fixed deposits to meet his short term financial goals or park his emergency fund. Given the ongoing rising interest rate regime, I suggest that he invest in bank FDs offering interest rates of 6% p.a. above. Some of the scheduled banks offering such interest rates include SBM Bank, Jana Bank, Suryoday Bank, Utkarsh Bank, Ujjivan Bank ESAF Bank. He should have FD tenures of 1-2 years, without an auto-renewal option, as the may get the opportunity to renew his FDs at higher interest rates.

In case, interest rates after FD maturity reach below 6% p.a., he can invest in direct plans of short-duration debt funds of HDFC Short Term Fund ICICI Prudential Short Term Fund, for building his fixed income corpus.

In case your son has a higher risk appetite, he can invest a part of his fixed income corpus in the direct plans of conservative hybrid funds like Kotak Debt Hybrid Fund ICICI Prudential Regular Savings Fund. As these funds have to invest 10-25% of their corpus in equities equity-related instruments, they can potentially generate higher returns than debt funds fixed deposits.

(Sending queries views at [email protected])

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