Skip to main content

Advantages debt funds - Help balance risk

   The core holdings in a debt fund are fixed income investments. A debt fund may invest in short-term or long-term bonds, securitised products, money market instruments or floating rate debt. The main investing objectives of a debt fund will usually be preservation of capital and generation of income.

 

   You should invest in both debt and equity. Investors should have a diversified portfolio. In the current market situation, should you invest in equity or debt? It is not advisable to put all your eggs in one basket. The portfolio should have a part of debt as well.

   Investors should have a mix of investment instruments in the portfolio so as to avoid risk, even if this may provide lower returns when compared to the booming stock markets. In addition to equity or equitylinked mutual funds, you should also allocate funds to fixed deposits and other small saving schemes. It is better to be risk-averse and sacrifice a part of the market gains.

   Debt funds are a good option. They give good returns and offer tax benefits. By investing in debt mutual fund schemes as a part of debt allocation, you get many advantages. Debt funds offer a superior riskadjusted proposition along with tax benefits.

   Fixed deposits are a popular option with conservative investors. They generally have a lock-in-period. A premature withdrawal by an investor involves a penalty. From an inflation adjusted perspective, fixed income mutual funds are a better option. Debt funds have a wide range of schemes offering something for all investors. Liquid funds, short-term income funds, GILT funds, income funds and hybrid funds are some.

   Depending on their investments in different instruments and maturity period, debt funds are classified as gilt funds (short-term, medium-term and long-term), income funds, short-term funds and ultra short-term funds. Gilts funds basically invest in government securities with different maturity periods while income or short-term funds invest in both government and corporate bonds, and other instruments.

   There are also ultra shortterm funds, which have an investment horizon of 3-6 months, invest in short-term papers such as certificate of deposits (CDs) and commercial papers (CPs). There is one more category called liquid funds or money market schemes. These funds are meant to provide easy liquidity and preservation of capital. These schemes invest in short-term instruments like treasury bills, collaterised borrowing and lending obligation (CBLO) market - an overnight borrowing and lending market for domestic financial institutions, CPs and CDs.

   The NAVs (a unit price) of these funds are directly linked to yield and hence likely to do better when interest rates are upward bound. However, the former categories are different from liquid funds. Their NAVs are directly linked to bond prices as they aim for capital appreciation and trading gains by trading in the bond market.

   Debt funds could generate better yields during economic growth, depending on the kind of scheme chosen by the investor. A fund invests in a range of securities leading to diversification of risk, an important parameter for an investor. Also, certain funds offer regular income schemes where interest is paid to the investor on his investments at regular intervals.

   The biggest advantage with debt funds is the many features. These include fixed income, tax advantage, riskreturn balance, and liquidity. The main advantages of debt funds are relatively lower risk, steady income, liquidity of investments, professional fund management expertise at low costs, besides diversification of portfolio to have a balanced risk-return profile.

 
   Debt funds also tend to perform better in periods of economic slowdown. They are an effective hedge against equity market volatility. They lend stability in terms of value and income to a portfolio. Some hybrid debt schemes take exposure to equity allowing investors to participate in the stock markets as well.

   Performance against a benchmark is considered to be a secondary consideration to absolute returns when investing in a debt fund.

 


Popular posts from this blog

Tata Mutual Fund

Being a part of the Tata group, the fund has the backing of a very trusted brand name with strong retail connect. While the current CEO has done an excellent job in leveraging the Tata brand name to AMC's advantage, it is ironic that this was just not capitalised on at the start. Incorporated in 1995, Tata Mutual Fund remained an 'also-ran' fund house for around eight years. Till March 2003, it had a little over Rs 1,000 crore in assets and 19 AMCs were ahead of it. But soon after that the equation changed. It was the fastest growing fund house in 2004 and 2005. During these two years, it aggressively launched six equity funds, two debt funds and one MIP. The fund house as of now stands at No. 8 in terms of asset size. This fund house has a lot to offer by way of choice. And, it also has a number of well performing schemes. Tata Pure Equity, Tata Equity PE and Tata Infrastructure are all good funds. It also has quite a few good debt funds. The funds of Tata AMC are known to...

UTI Mutual Fund

Even though only a few of UTI’s funds are great performers, this public sector fund house has many advantages that its rivals do not. It has a huge base of retail equity investors and a vast distribution network. As a business, it looks stronger than ever, especially in the aftermath of credit crunch. UTI is, by a large margin, the most profitable fund company in the country. This is not surprising, since managing equity funds is more profitable than debt. Its conservative approach and stable parentage is likely to make it look more attractive to investors in times to come. UTI’s big problem is the dragging performance that many of its equity funds suffer from. In recent times, the management has made a concerted effort to improve performance. However, these moves have coincided with a disastrous phase in the stock markets and that has made it impossible to judge whether the overhaul will eventually be a success. UTI’s top performers are a few index funds, some hybrid funds and its inf...

Salary planning Article

1. The salary (basic + DA) should be low. The rest should come by way of such allowances on which the employer pays FBT and you don't pay any tax thereon. 2. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property and without any limit on a commercial or rented house. 3. The repayment of housing loan from specified sources is also deductible irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh of Sec. 80C. 4. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental or 20 per cent of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone the family benefits. Yes, the maximum benefit accrues when the rent is over 20 per cent of the salary. 5. A chauffeur driven motor car provided by the employer has no perk value. True, the company would...

8 Investing Strategy

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-...

Debt Funds - Check The Expiry Date

This time we give you an insight into something that most debt fund investors would be unaware of, the Average Portfolio Maturity. As we all know, debt funds invest in bonds and securities. These instruments mature over a certain period of time, which is called maturity. The maturity is the length of time till the principal amount is returned to the security-holder or bond-holder. A debt fund invests in a number of such instruments and each of these instruments would be having different maturity times. Hence, the fund calculates a weighted average maturity, which would give a fair idea of the fund's maturity period. For example, if a fund owns three bonds of 2-year (Rs 30,000), 3-year (Rs 10,000) and 5-year (Rs 20,000) maturities, its weighted average maturity would be 3.17 years. What is the big deal about average maturity then, you may ask. Well, knowing a fund's average maturity is important because it tells you how sensitive a fund is to the change in interest rates. It is ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now