When it comes to financial wealth, every individual has several aspirations or goals which are long-term in nature. These could be related to preserving hard-earned money or legacy planning, achieving life-stage milestones like child’s education or marriage expenses, and saving for retirement.
For most of these goals, investors prefer to play safe, and invest without taking market risk.
For instance, when it comes to preserving hard-earned money, successful individuals like entrepreneurs and professionals may have taken significant risks to build wealth over the years, and would now prefer to preserve wealth.
Similarly, investors planning to leave a legacy for their grandchildren, would like to grow the corpus in a conservative manner. Goals like child’s education or wedding expenses are critical too, and investors prefer to play safe with their investments.
Finally, comes the retirement goal, for which people tend to start planning quite late. Preferably, retirement planning should be done well in advance.
There are two common traits among all the above goals. One, criticality of the goal, such that you wouldn’t want to end up with corpus lower than required to meet these goals. Second, all the above goals are long-term in nature.
To meet such goals, investors need to invest wisely, and marry their investments with long-term goals, to earn consistent returns over the entire period. There are at least four investment avenues for investors to meet long term goals at a reasonable return and without taking undue risk.
Long-term bond funds are the preferred vehicle of all the options:
Tax-free Bonds: Till a few years ago, PSU infrastructure companies like NHAI, REC, PFC, HUDCO, NTPC etc. mobilised money from investors by issuing bonds on which the interest earned was tax-free for investors. But, primary issuance of tax-free bonds have stopped. In the secondary market, these bonds are not very liquid and their yields range between 6% and 6.50%. The longest tenure for tax-free bonds is 17 years (REC, 5 Nov 2035) yielding just 6%. So, naturally for long-term financial goals, duration of such bonds are inadequate. Even if one invests in these bonds, post maturity, the investor will have to take reinvestment risk.
10-year Bank FDs and RBI Taxable Bonds: Of these, investors can get between 6% and 6.5% on long-term bank FDs and about 7.75% on RBI Bonds which are of 7-year tenure. For both, income is taxed as per marginal income tax slab.
Public Provident Fund (PPF): A popular long-term investment option backed by the government that offers safety and tax-free rate of return at 7.6%. It’s a 15-year scheme with an option to extend for 5-year block after maturity. However, in PPF one can invest only up to Rs 1.5 lakh in a financial year. Also from liquidity perspective, investors can withdraw only partially after 6 years of investment.
Long-duration MFs: Markets regulator Sebi recently standardised all fund categories under which it has allowed ‘Long Duration’ schemes within fixed income category. These funds build portfolio duration of more than 7 years and hence will allocate to long-term assets, thus, suitable for those seeking investment solutions for meeting their long-term financial goals.
For example, consider a fund that invests only in a long-dated Government Security, say, a paper maturing in 2046, i.e. after 28 years, and holds that paper till maturity. The fund will, every six months, earn all interest payments from the government, for 28 years and then at maturity, will receive the principal amount. Thus the fund will earn the current yield, if security is held till maturity. Also if underlying investment is held till maturity, it would not be subjected to interest rate risks, whether interest rate increases or decreases.
The above paper is currently yielding 8.1%. Post-expenses and taxes, investors could expect about 7% tax-free returns from such funds. These funds are also highly liquidity since units are bought and sold at NAV-linked prices by the fund house. Since, these funds invest in government securities and highly rated papers, these are ideal for long-term investing.
(The writer is ED and CEO at Reliance Mutual Fund)