Skip to main content

Debt portfolio can yield good returns

Buy Gold Mutual Funds

Invest Mutual Funds Online

Download Tax Saving Mutual Fund Application Forms
Call 0 94 8300 8300 (India)
It's a good time for debt allocation with both short-term and long-term options offering good returns


   In the midst of a rising inflation and the resultant higher interest rate scenario, there is some good news if you are a short-term investor. Your money, even if parked for a short period of time, can get you good returns. In the last few months, the annualised returns offered by money market and liquid funds have moved upwards. The annualised returns have been in the range of over six percent.


   Ironically, the returns offered by a number of sector funds have been substantially lower or negative during the same period. After more than a 1,000-point rally, index funds managed to add some green to their chart.


   So, the debt market is not a bad place to be in considering that many other assets are looking not too comfortable. While equity always carries risk and its riskreward ratio changes according to timing of entry, other assets too are demanding perfect timing. Property is a perfect example which was once considered a safe haven for the long term. Commodities, because of their global linkage, are increasingly volatile and expensive too. Hence, for the risk-averse investor, there are only a few options in terms of asset classes. But the good news is that the segment as a whole is getting lot of action and with the recent budget proposals, the debt market in India, is in for major growth.


   When you consider debt as an asset class, there is a growing confusion among - should they choose innovative products or simply stick to vanilla products where what you see is what you get (or earn in this context). The fear is understandable considering the fact that the 2008 financial crisis is a by-product of smart innovations in debt and derivative products.


   So, in an era where debt products are giving smart returns and even closer to double digit, investors can stick to vanilla options. While debt is for the short term and for those who don't need risk, it can have some allocation if the portfolio is aiming for a 10 percent growth over the medium term. Here, investors will have to keep in mind the tax implications as 10 percent returns offered by a fixed deposit need not be tax-free returns. Since interest income is taxable, you need to keep in mind the tax-free exemption limit. While super senior citizens have the luxury of parking a large corpus because of their higher exemption limit in the coming days, it is not the case for many others.


   In this context, monthly income plans of mutual funds can come in handy. While dividend is tax-free because of dividend distribution tax, it offers some added advantage in the form of lower effective tax on long-term capital gains. If you were to take into account the indexation benefit, the real returns from these products can be superior to other vanilla debt products.


   Interestingly, in the last few months, investors have also had the opportunity to park long-term money in debt options with a number of issuers hitting the market with 10-year maturity papers. They are a good option in the current environment because of high interest rates. For instance, any investor would be willing to settle for a 9-10 percent interest rate option for a period of 10 years if liquidity is not an issue.


   Unfortunately, very few investors fall into this category as more often than not, debt investors prefer liquidity. While a retired individual needs regular source of income, a high net worth individual may look at debt for tiding over liquidity. For such investors, a 10-year product may not fulfill the requirement unless asset allocation demands such a product for risk management. Those who can afford to allocate can make the best use of the current environment.

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 Mutual Funds Online

Transact Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online

      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver Mutual  Funds  Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

 

 

Popular posts from this blog

All about "Derivatives"

What are derivatives? Derivatives are financial instruments, which as the name suggests, derive their value from another asset — called the underlying. What are the typical underlying assets? Any asset, whose price is dynamic, probably has a derivative contract today. The most popular ones being stocks, indices, precious metals, commodities, agro products, currencies, etc. Why were they invented? In an increasingly dynamic world, prices of virtually all assets keep changing, thereby exposing participants to price risks. Hence, derivatives were invented to negate these price fluctuations. For example, a wheat farmer expects to sell his crop at the current price of Rs 10/kg and make profits of Rs 2/kg. But, by the time his crop is ready, the price of wheat may have gone down to Rs 5/kg, making him sell his crop at a loss of Rs 3/kg. In order to avoid this, he may enter into a forward contract, agreeing to sell wheat at Rs 10/ kg, right at the outset. So, even if the price of wheat falls ...
Read more

Fortis Mutual Fund

Fortis Mutual Fund, a relatively new player, it is still to prove its case and define its position in the industry. In September 2004, it came onto the scene with a bang - three debt schemes, one MIP and one diversified equity scheme. And investors flocked to it. Going by the standards at that time, it had a great start in terms of garnering money. Mopping up over Rs 2,000 crore in five schemes was not bad at all. The fund house has not been too successful in the equity arena, in terms of assets. Though it has seven equity schemes, it is debt and cash funds that corner the major portion of the assets. Most of the schemes are pretty new, and the two that have been around for a while have a 3-star rating each. The last two were Fortis Sustainable Development (April 2007), which received a rather poor response, and Fortis China India (October 2007). Fortis Flexi Debt has been one of the better performing funds, after a dismal performance in 2005. It currently has a 5-star rating. None ...
Read more

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...
Read more

Equity investors should track market developments

The stock markets have been volatile over the last few days. They are in a sideways movement and trying to find the bottom after a fall of 20 percent a week ago. The market sentiments are not very positive at the moment and the recent developments are expected to dampen them further. Globally, governments and central banks are trying to cut rates and announce packages to improve business sentiments. These are some of the major developments in the markets last few month: A) Global On the global front, another large US bank went into a financial crisis. The US government took quick measures to avoid the spread negative sentiments in the markets. The US government announced a bail-out package and agreed to shoulder the losses on the bank's risky assets. China announced a large cut in interest rates and reserve ratio to boost the investor sentiments in the markets. Recently, the World Bank announced China's growth rate next year will come down to 7.5 percent. The European ...
Read more

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...
Read more
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