Why Debt Mutual Funds are better than FDs?

About Client:

• A private limited company (ABC Limited) has an excess working capital of INR 10 crores.
• It primarily parks these funds in FDs.

Challenges and Observations:

• ABC Limited did not have a predefined investment policy to park its surplus funds.
• It invested all of its funds in an FD, which increased the concentration risk due to investment with a single issuer.
• ABC Limited often got lower returns on their investments due to early withdrawal penalty charges of an FD and this also reduced the liquidity of funds the company required.

Process:

• A multi-asset investment policy was designed by considering the company’s risk profile.
• IFA’s team advised ABC Limited to invest these surplus funds in debt mutual funds.
• Appropriate debt mutual funds were selected using various thresholds like credit rating, duration, AUM, and yield to maturity.
• IFA Global facilitated the entire investment process of ABC Limited in debt mutual funds.

Outcome:

• As seen in the graph, by parking their surplus funds in debt mutual funds ABC Limited was able to generate 1% - 2% higher returns based on the time horizon of the investment.

• This means a higher return of up to 20 lakhs on a 10 crore investment.
• Investing in various debt mutual funds reduced the concentration risk of the investment.
• ABC Limited also generated a 1.5% higher post-tax return due to indexation benefits on the investments that were held for more than 3 years.