Skip to main content

Good time to Invest in Long Term Debt Funds



With the RBI's first cut signalling a turn in the rate cycle, add funds that follow a duration strategy to benefit from the fall.

 

Monetary policy review disappointed the debt market because the RBI left the interest rates unchanged. The bench mark 10-year bond yield, which had declined in hopes of a rate cut, shot up from 7.65% to 7.73%. But experts are confident that the RBI will cut interest rates in the coming months. It is widely believed that the repo rate could be lowered by 75-100 basis points in 2015. With inflationary expectations at a 21 quarter low and a benign global environment, we are in the early phases of a prolonged rate easing cycle.

Where should you invest If interest rates are cut, debt funds that have lined their portfolio with long-term bonds will do very well. Long-term gilt funds have given spectacular returns in the past few months. The category has delivered more nearly 18% in the past one year. In the past six months alone the category has given nearly 12%.

However, investors should be careful when to exit because the good times won't last forever. The long-term gilt funds are looking attractive currently when interest rates are falling. But 18-24 months from now when the interest rates stop falling, the returns from these funds could turn sub-optimal. Long-term gilt funds are one-way funds. They invest in long-term government bonds and do not reduce maturity even when the rates have started rising.

Besides long-term gilt funds, there are income funds that invest in a mix of gilts and corporate bonds. Income funds have also done well in the past few months, delivering 14% in the past one year and 8.3% in the past six months (see table). Though the returns may not match those from long-term gilt funds, these funds are more stable. Experts feel this is the category to bet on now.

Choosing the Category

Within income funds, there are schemes that invest in long-term bonds. These duration funds do not lower the average maturity of their holdings below a certain level. While this can be rewarding when interest rates fall, it can lead to losses if rates rise.

Investors who don't want to time the interest rate cycle could consider income funds that focus on the accrual of interest on the bonds in their portfolio.

Another sub-category within income funds is that of dynamic bond funds. These funds are flexible about where they invest. They will try to benefit from a duration strategy when rates are falling, and quickly switch to an accrual strategy when rates are moving up. Sometimes they even go into cash. These are all-weather funds and their fund managers enjoy the maximum flexibility. They are best suited for retail investors' long-term portfolios. These funds underperform only if the fund manager gets his calls wrong.

What are the risks

When you add duration-based funds to your debt portfolio, you run the risk that interest rates may remain stagnant or even move up suddenly. This had happened most recently in the summer of 2013, when a sudden withdrawal by FIIs put pressure on the rupee, forcing the RBI to intervene. In one month, long-term gilt funds fell almost 5-6%.

Similar risks prevail even today. Inflation has softened due to a steep fall in oil prices. If oil prices rebound sharply, inflationary pressures could revive, forcing the central bank to tighten. Second, FIIs have invested a lot of money in India's debt market in the recent past. Any event, such as the Fed rate hike expected in mid-2015, which triggers an exodus of FII money, could lead to tightening.

Remember that higher the average maturity of a duration fund, higher the potential for gains. But such a fund's risks are also commensurately higher.

Your fixed income portfolio

Your long-term fixed-income portfolio should consist of three baskets: funds that hold-to-maturity, accrual funds and duration funds. The hold-to-maturity basket should include bank fixed deposits, fixed maturity plans, NCDs and tax-free bonds. Highly conservative investors, who believe that their fixed-income portfolio should not be volatile, should stick to the hold-to-maturity basket.

Investors who are ready to tolerate some volatility in the quest for higher returns could go for the accrual and duration baskets. Moderate investors may allocate 25% of their fixed-income portfolio to these baskets and aggressive investors up to 50%. When investing in duration funds, have an investment horizon of at least three years to overcome setbacks, such as interest rates stagnating or even moving up temporarily.

Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

Invest in Tax Saver Mutual Funds Online -

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

---------------------------------------------

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Popular posts from this blog

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Am you Required to E-file Tax Return?

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   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund

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 Merger of Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund Tata Mutual Fund has decided to merge Tata Indo-Global Infrastructure Fund with Tata Equity Opportunities Fund, with effect from January 16, 2015.   Investors of Tata Indo-Global Infrastructure Fund can redeem/ switch out units from December 13, 2014 to January 12, 2015 without paying any exit load. For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call Leave a missed Call on 94 8300 8300 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 Invest Any Mutual Fund Online Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund A...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...
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