Should you invest in debt funds to build up retirement capital?

I suggested to my son to invest in mutual funds to build up his retirement capital. He can comfortably invest at least 20,000 a month in mutual funds. Please also suggest whether he should invest in debt funds for this purpose.

– Name masked on request

(Query answered by Naveen Kukreja – CEO and Co-Founder,

Stocks as an asset class outperform both inflation and fixed income instruments by a wide margin over the long term. So I would recommend your son invest in equity mutual funds, not debt funds, to build his retirement capital. It can allocate its investable monthly surplus also through SIP 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; and Parag Parikh Flexi Cap Fund or PGIM India Flexi Cap Fund. If he has the ability to save taxes under Section 80C, then he can invest in direct plans of Axis Long Term Equity Fund and/or Mirae Asset Tax Saver Fund via SIP.

Since stocks can be volatile in the short term, he may invest in fixed income instruments like debt funds or term deposits to meet his short-term financial goals or park his emergency fund. Given the continued rise in the interest rate regime, I suggest he invest in bank FDs offering interest rates of 6% per annum and above. Some of the regular banks offering such interest rates include SBM Bank, Jana Bank, Suryoday Bank, Utkarsh Bank, Ujjivan Bank and ESAF Bank. He should have 1-2 year FD terms, with no auto-renewal option, as he might have the option to renew his FDs at higher interest rates.

In case the interest rates after maturity of the FD reach less than 6% per annum, it can invest in direct plans of short-term debt funds of HDFC Short Term Fund and ICICI Prudential Short Term Fund, for building up its corpus of fixed-income securities.

If your son has a higher risk appetite, he can invest some of his fixed income corpus in the direct plans of conservative hybrid funds such as Kotak Debt Hybrid Fund and ICICI Prudential Regular Savings Fund. As these funds must invest 10-25% of their corpus in equities and equity-related instruments, they can potentially generate higher returns than debt funds and term deposits.

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