A reader asks, “For the gilt portion of my portfolio for a 10+ year goal, would you recommend passive or active funds?” Let us look at the different options available to an investor. Instead of looking at this as an active vs passive question, let us look at it from the pov of NAV volatility and the investor’s risk appetite.
Actively managed funds: We have recently reported the list of passive debt funds in India. For a 10+ year goal, most investors may not be able to handle the extreme volatility of a 10-year constant maturity debt fund.
A better option is the actively managed normal gilt fund which is also a dynamic bond fund. See: Gilt funds vs Dynamic Bond Funds vs Corporate Bond Funds: Which is the better choice?
Investors not wanting too much NAV volatility (relative to gilt funds) and not considering some credit risk can choose corporate bond funds.
A conservative hybrid fund like the one from Parag Parikh can be considered. See: Who should invest in Parag Parikh Conservative Hybrid Fund?
Passively managed funds: Investors who do not mind sacrificing some returns for lower volatility can opt for something like Edelweiss Short Duration Index Fund. Usually, this would not be recommended for a 10Y-plus goal, but it can offer steady growth compared to a gilt fund but may be potentially less rewarding.
Other passive funds are ETFs (which are best avoided due to NAV-price deviations) or target maturity funds (closed-ended funds) at the time of writing. Considering the change in debt fund taxation from 1st April 2023, new target maturity funds may be in short supply.
We recommend normal gilt or corporate bond funds or the conservative hybrid fund mentioned above for those who do not mind some NAV volatility and the Edelweiss short-term index fund for those who prefer lower volatility.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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