There are many investors with money to be invested for long periods of time, but they do not want to invest money in the equity markets. What are the options for such investors?

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The English translation is as under:

Looking for long term investment, but are averse to equity market

There are many investors with money to be invested for long periods of time, but they do not want to invest money in the equity markets. What are the options for such investors? Well, thee are a few traditional options like PPF, certain options from small savings schemes, endowment policies from life insurance companies, long term government bonds and debentures from private sector companies.

While all these are good options, they have certain limitations, especially with respect to a fixed maturity date or lock-in periods. Say for example, investment in endowment plans would mean the money remains locked in for very long periods of time. At the same time, while government bonds and company debentures are tradable, they have a fixed maturity period. If the investor’s exact time horizon does not match with the maturity date of the bond or debenture, one may have to keep the money idle from the maturity date till the need arises.

When the investment periods are as long as ten to twenty years, and beyond, one may not know the exact date when the money would be needed for certain expenses. Forget the exact date, one may not even know in advance, the exact month or even the year. In such a case, picking up the right investment is not possible and investors know that. They invest the money with full understanding of this uncertainty.

Are there products with variable investment periods?

Well, open-ended debt mutual funds serve exactly this purpose.

1. These are debt funds, and do not invest in equity markets,
2. Money can be invested for very long periods in these schemes,
3. Since these are open-ended, there is no maturity period. Hence an investor can take the money out as and when required.

So, let us understand the options among the debt funds that may be considered for investment for very long periods of time. Under the new classification of mutual funds, there are a few categories that may be looked at in such a scenario:

1. Medium to long duration fund
2. Long duration fund
3. Dynamic bond fund
4. Corporate bond fund
5. Credit risk fund
6. Banking and PSU fund
7. Gilt fund, and
8. Gilt fund with 10 year constant duration

Let us look at the major differences among these. The first three categories are likely to invest in a mixed basket of corporate debentures, bank bonds, and government bonds; corporate bond fund and credit risk fund would predominantly invest in debentures issued by companies; banking and PSU fund would invest in debt papers issued by banks and Public Sector Companies, whereas the last two would only invest in government securities.

As we had seen earlier, investment in corporate bonds carries credit risk, whereas government securities are free from that. On the other hand, there is a risk that the interest rates in the economy may fluctuate, which causes market prices of debentures and bonds to move. This is the interest rate risk that one would be exposed to even in case of mutual funds investing in government bonds.

Understand properly and choose wisely.