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

Mutual Fund Review: Religare Tax Plan

Tax Plan is one of the better performing schemes from Religare Asset Management. Existing investors can redeem their investment after three years. But given the scheme's performance, they can continue to stay invested   Given the mandated lock-in period of three years, tax saving schemes give the fund manager the leeway to invest in ideas that may take time to nurture. Religare Tax Plan's investment ideas revolve around 'High Growth', which the fund manager has aimed to achieve by digging out promising stories/businesses in the mid-cap segment. Within the space, consumer staples has been the centre of attention for the last couple of years and can be seen as one of the key reasons for the scheme's outperformance as compared to the broader market. It has, however, tweaked its focus and reduced exposure in midcaps as they were commanding a high premium. The strategy seems to have worked as it returned a 22% gain last year. Religare Tax Plan has outperformed BSE 100...

Good time to invest in Infrastructure Funds

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Good time to invest in infrastructure The Sensex has gained almost 10 per cent from May 15 till date, while the CNX Infrastructure Index has gained almost 17 per cent in the period. The price to earnings ( P/ E) ratio of the BSE Sensex is 18.96; for the CNX Infrastructure Index, it is 24.57. The estimated P/ E for next year is 14.04 for the Sensex. Of the 24 companies that make up the CNX Infrastructure Index, six have a P/ E higher than 20. Does this mean infrastructure is fairly valued? Or, has it run up quite a bit? According to experts, barring stray companies, the infra sector is fairly valued and it is a good time to invest. Even if some companies are facing debt restructuring problems, once interest rates come down and regulatory norms become flexible, they will start giving good re...

Mutual Funds: Past Performance is not just everything

Many a times your agent / distributor / relationship manager tries to push you some mutual fund schemes by enticing you with a typical sales pitch…"Sir, this scheme has generated 20% returns in the past one year." And this sales pitch often gets louder when the market conditions have been favourable. Some of the agents / distributors / relationship managers have another unique way of luring you. They say, "Sir / madam this scheme has been awarded the best scheme award in the past by a leading business channel"... And hearing all these sales talks you investors very often get attracted and sign a cheque in favour of the respective scheme.   But please ask yourself do you hear these sales talks when the capital markets turn turbulent? Why is it so that your agent / distributor / relationship manager avoids talking to you during turbulent times of the capital markets and doesn't boast about returns generated by the respective funds or awards being conferred on t...

What are Tax savings Bank Fixed Deposits?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)   These are a special type of bank fixed deposits, of five-year tenure, which allow you to have tax benefits for investments of up to Rs 1 lakh per person per financial year. Investments in these FDs give tax benefits under 80C of the Income Tax act. These are not very liquid investments because the money is locked-in for five years. One also has the option to continue the FD for another five years after the lock-in ends. Happy Investing!! We can help. Call 0 94 8300 8300 (India) Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com --------------------------------------------- Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax ...

Dynamic Bond Funds

Invest Mutual Funds Online Download Mutual Fund Application Forms Apart from liquidity and returns, tax efficiency is another factor which should be taken into account for such investments. Today, while you're getting decent, predictable returns from bank fixed deposits, they, along with FMPs, can be ruled out as options because of the lack of interim liquidity. Hence, the only other option that you have is a dynamic bond fund. While investments in dynamic bond funds can be a compromise in terms of returns, they are extremely liquid and more tax efficient.   Some of the dynamic bond funds that you can invest in are: UTI Bond Fund, Birla Sun Life Dynamic Bond Fund Templeton India Income Fund ------------------------------------- Invest Mutual Funds Online Transact Mutual Fund Online   Download Mutual Fund Application Forms from all AMCs Download Mutual Fund Application Forms   Best Performing Mutual ...
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