For investors who cannot stomach equity market volatility, liquid funds should be the starting point, according to Tarun Birani, Founder & CEO at TBNG Capital Advisors. “Start with liquid funds,” Birani said, describing them as the lowest-volatility category with maturities of less than 91 days that track money market rates.He said liquid funds carry a small exit load if redeemed within seven days and help investors become comfortable with NAV movement, expense ratios and taxation without experiencing significant drawdowns. “After 6–12 months, graduate to short duration funds. Corporate bond funds last, once investor accepts some credit/duration risk for extra yield,” he said. Birani added that the progression should be anchored to an investor’s liquidity needs, investment horizon and emotional tolerance before product selection.On returns, Birani urged investors not to rely on longer-term historical performance. “Honest answer most investors don’t hear: don’t extrapolate the trailing three-year number,” he said, adding that such returns include one-off gains from interest rate cuts. “Last 12 months is a more realistic outlook,” he said.According to Birani, liquid funds currently deliver around 6.3%–6.4%, while short-duration and corporate bond funds offer around 5.4%–6.5%. Current yields to maturity stand at 5%–6.5% per annum, compared with bank fixed deposits offering 6%–7% for one- to three-year tenures, with senior citizens receiving an additional 0.5%–0.75%. He also noted that following the 2023 tax changes, gains from debt mutual funds are taxed at the investor’s slab rate, narrowing their tax advantage over fixed deposits.On choosing the right debt fund, Birani said investors should follow one principle. “Golden rule: match fund duration to goal horizon. Mismatch = most common pitfall,” he said. He recommended liquid, ultra-short duration, money market or target maturity funds maturing in 2026–27 for one-year goals. For three-year goals, he suggested short-duration funds, AAA corporate bond funds or target maturity funds maturing in 2028–29.Birani said target maturity funds are a good fit for investors with a well-defined investment horizon. “Held to maturity return = YTM at purchase, net of expenses; rate risk declines as maturity nears,” he said. He added that these funds have low expense ratios, although investors should be aware that NAVs fluctuate if they exit early, alongside mild reinvestment risk on coupons and slab-rate taxation.Explaining the impact of interest rate cycles, Birani said bond prices move inversely to rates, with long-duration and dynamic funds being more sensitive than liquid or short-duration funds. Rather than trying to predict interest rate movements, he recommended “SIP/STP staggered entry, ladder target maturity funds, keep duration matched to horizon, pick on credit quality & cost not rate forecasts.”Birani identified duration mismatch as the biggest mistake conservative investors make, followed by choosing funds based only on past returns while ignoring credit quality, portfolio concentration and performance during periods of market stress.On portfolio allocation, Birani said 60%–90% of a conservative portfolio is typically invested in fixed-income assets, with the balance allocated to hybrid or equity investments if growth is still required. He recommended liquid or ultra-short funds and sweep fixed deposits for emergency needs, short-duration funds, AAA corporate bond funds, near-term target maturity funds and fixed deposits for one- to three-year goals, and PPF together with longer-dated target maturity funds for long-term allocations. For larger portfolios, he suggested blending debt mutual funds with direct fixed-income instruments.For the entire discussion, watch the accompanying video:
