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Do not exit debt fund now

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If redeemed now, notional losses will get converted into real losses

DEBT funds have come in focus in last one-month period, as yield from government securities has turned volatile with the Reserve Bank of India (RBI) taking measures to contain the rupee volatility against the US dollar.

 

While yield from government securities has been volatile in the July­August period quoting in the range of 8.40 to 9.40 per cent, investors' debt portfolios have taken a hit.

As per the Association of Mutual Fund in India (Amfi) data, in July, debt mutual funds saw an outflow of Rs 47,953 crore, as investors withdrew money from income, liquid and money market schemes.

Debt mutual fund investors are looking for answers at a time when they have been hit by a sharp drop in bond prices, especially those who had invested in long-duration bond funds.

Fixed maturity plans (FMPs) are flooding the market as an option; bank fixed deposit or term deposit is another option for investors in today's volatile market, say experts.

High value fixed deposits of 15 lakh to Rs 1 crore for one to two year tenures are fetching 9 per cent to 9.25 per cent return, whereas, deposits of below Rs 15 lakh are fetching returns in the range of 8 per cent to 9 per cent. The top performing FMPs have given a one-year return of 8.94 per cent to 9.27 per cent. But there have been some whose annual returns have been lower at 6-7 per cent.

In case of term deposits, there is certainty on return, but in case of FMPs, same return is not assured.

Since return on mutual fund investments are tax free, they look more attractive if one is ready for some risks.

In FMPs, the investment objective of the scheme is to generate income through investments in debt securities /money market instruments maturing on or before the maturity date of the scheme.

For those already having exposure to debt schemes, experts say it may not be a good time to exit debt funds, as by doing so, the notional losses will be converted into real losses.

Market has seen an unprecedented volatility. In terms of threemonth return in duration fund, dynamic bond fund and income fund, there has been an unprecedented volatility. The investor should hold on to their investments for 15-20 months for expected returns. If an investor enter debt schemes with a view that market is volatile, then it is a good step. He should have an investment horizon of 18 months for the duration funds and 12 months for short-term and income funds to get the expected return.

It is the right time to invest in FMPs in particular. Here one can work out indicative return. FMPs are as short as three months and as long as five years in duration.

With three-month treasury bills interest rate shooting up beyond 11 per cent, investors can look forward to similar returns minus the expense ratio charged by the mutual fund houses by investing in a threemonth FMP .

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