A reader says, “I am 30 years old and currently invest in the HDFC Sensex Index Fund for my equity allocation and the Parag Parikh Dynamic Asset Allocation Fund for my debt portion. Articles from freefincal have been very helpful in understanding and making investment decisions for myself. While I must not seek financial advice as mentioned, I would still like to gain some insights on the risks associated with a debt-oriented fund like the Parag Parikh Dynamic Asset Allocation Fund, particularly when considering it for long-term debt allocation. Are there any key metrics one should track for such a fund? I am also interested in understanding whether long-term debt funds can be considered a good option for rebalancing from equity. Any relevant articles or insights you could share on this topic would be helpful”.
Debt mutual funds are tricky objects. Their risks can be sudden and nknown. For example, a rate hike can result in a prolonged period of poor returns. Bonds can change their credit rating or even default. Most retail investors have a poor understanding of these risks.
Then there is the issue of tax. Tax from debt funds (holding more than 65% bonds) is taxed as per the slab. This typically discourages those in higher tax slabs. The main attraction towards Parag Parikh Dynamic Asset Allocation Fund (PPDAAF) is its tax status.
Tax status for funds like PPDAAF holding less than 65% and more than 35% Indian equity: Gains from units purchased on or before 3Y are short-term gains and taxed as per the slab, and gains from older units are taxed at 20% with indexation. Is this beneficial than the slab rate? Depends (more on this later).
The point is, we should never choose a fund only for its tax status without considering risks. Let us delve into the portfolio of PPAAF to learn more.
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The average portfolio maturity of the bond holdings has ranged from about 4-5 years for the fund. This is well-suited for a long-term goal (> 10 Y). However, since its inception, the fund has held about 55% debt and about 37% equity on average. That is quite a lot of equity! This means if the markets crash, you can expect a significant dip in the fund’s return. Are you ready to handle this in your “debt” component?
This is how the fund’s quarterly returns have varied so far. Such variations will also be seen in its annual returns (not enough history at the time of writing).
| Quarter Ending | Absolute Return |
| Jun-2024 | 4.4257 |
| Sep-2024 | 3.8646 |
| Dec-2024 | 0.1683 |
| Mar-2025 | 1.5281 |
| Jun-2025 | 2.7089 |
| Sep-2025 | 0.4359 |
Pairing PPDAAF with an equity fund will have higher volatility than an equity fund with a more conventional debt fund. Are you ready to handle this to avoid paying tax as per the slab?
The reader says, “I would still like to gain some insights on the risks associated with a debt-oriented fund like the Parag Parikh Dynamic Asset Allocation Fund”.
Adding this fund as a “debt fund” will increase the portfolio volatility – the opposite of what a debt fund should do. Therefore, it is not for all investors. PPDAAF can be used by those with a higher net worth and those who are investing more than what is required for their goals, or have already achieved their goals using conventional debt funds, and are willing to appreciate the risks associated with this fund. I use it for my retirement goal as I fit into this group (at least I would like to think so!).
Higher net worth does not mean high risk tolerance or risk awareness! The conservative hybrid fund from the same AMC is a relatively better choice, volatility-wise, if you can overlook the slab tax. Parag Parikh Dynamic Asset Allocation Fund vs Parag Parikh Conservative Hybrid Fund
The reader also says, “I am also interested in understanding whether long-term debt funds can be considered a good option for rebalancing from equity”. Yes, most certainly, but which long-term debt fund matters!
We recommend using funds that hold good-quality bonds maturing within 10 years (preferably about 5Y or medium-term) for most investors.
In summary, for most investors, a more conventional medium-term debt fund is a better choice. Parag Parikh Dynamic Asset Allocation Fund is suitable only for those with good risk awareness.
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