Skip to main content

Medium and Long Term Debt Funds

 

In the last few months, as the Reserve Bank of India went on cutting rates, mostly surprising market players with mid-policy decisions on rates, debt funds with longer duration came into the limelight. This is because in a falling interest rate scenario, medium and long term debt funds stand to gain from capital appreciation. As yields fall because of the lower rate of interest in the economy, prices of bonds would rise which, in turn, would lead to capital appreciation for the funds holding bonds with maturities of 1,2,3... years. Change in the rate of interest, however, usually does not lead to much price appreciation for bonds of shorter duration. In the mutual fund industry, usually debt funds which aim to take money from investors who have an investment horizon of between one and three years are categorised as medium-term funds. On the other hand, those funds which aim to take in investors with a horizon of more than three years are categorised as long term debt funds. Fund industry officials say about 15-20% of one's debt portfolio should be invested in medium-term funds which take credit calls as well as duration calls. Credit calls are betting on those bonds which have lower than `AAA' rating on the hopes that these bonds, over the next 2-3 years, will improve their credit ratings, leading to price appreciation. Usually, these funds invest in AAA rated bonds and also some part into bonds rated lower, but do not invest in debt instruments with credit ratings lower than AA. There is no junk play in these funds.

On the other hand, a duration call is betting on the fact that the rate of interest in the economy will fall, leading to price appreciation. These funds are usually more aggressive in nature and have the potential for good YTM (yield-to-maturity) for investors with up to three years investment horizon.

In these funds, the fund managers invest in bonds of good companies which, as the economy improves, are likely to do better than the economy in general and, hence, could improve its credit rating. In addition, if the rate of interest in the economy falls, prices of these bonds will also rise because of falling yield, which in turn would lead to capital appreciation. And, hence, the gains in these funds could be two-fold.

Bond yields and prices are inversely related

Bond yields and price are inversely related. Here's why. Assume the annual rate of interest on a bond is 10% and its price when offered to the public for the first time is Rs 100. So all those people who hold the bonds for a year will receive Rs 10 at the end of the year. If over the one year after allotment, the price of the bond steadily rises to Rs 110. At the end of the first year, the original investor takes Rs 10 (interest income) and then sells the bond at Rs 110. The second holder will get Rs 10 at the end of the second year. However, for the second holder the interest income at the end of the second year will be Rs 10 on an investment of Rs 110.So, for this person, the yield (interest income as a percentage of the price paid) works out to approximately 9.1%. So here a rise in the price leads to a fall in bond yield.

Inversely, if the price of the same band falls to Rs 90 at the end of the first year and is sold to another buyer who holds it for a year and receives Rs 10, the yield for the second holder will be approximately 11.11%. In the second case, the fall in bond prices led to higher yield.

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

Real Returns in Investing

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 Real Returns in Investing     A Anil Singh (name changed), 44, works with a private company and believes in investing his entire savings in fixed deposits. His financials from the year 2000 till date is given in the table. Anil's savings in FDs gave him an average return of around 8%. The total amount saved over the 174 months (From January 2000 to June 2014) is Rs 49.80 lakh. The value of his investment today is around Rs 66.71 lakh. Naveen Singh (name changed), 44, works in a similar profile like Anil. However his expenses were on the higher side. His financials are as in the table. Naveen invested only in equities. The total amount saved over the 174 months (From January 2000 to June 2014) is Rs 38.40 lakh. The v...

Budget 2014 Highlights for Saving

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   The new finance minister Arun Jaitley has just presented his first budget. What measures does the budget contain that will specifically impact savers and investors? Here they are: 1. Housing loans exemption for self-occupied properties increased to Rs2 lakh: Earlier this amount was Rs1.5 lakhs. This move barely keeps pace with the inflation in asset values.   2. Investment limit under 80 (C) increased to Rs1.5 lakh: This is a good move again and offers some relief to taxpayers.   3. IT exemption increased to Rs2.5 lakh, Rs3 lakh for senior citizens. This comes as a minor relief for taxpayers.   4. Annual PPF ceiling to be enhanced to Rs1.5 lakh, from Rs1 lakh: This is in tune with the change in 80C.   5. Long term capital gains tax for debt funds has been rai...

ICICI Prudential MIP 25 - Invest Online

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   ICICI Prudential MIP 25     (CRISIL Rank 2)   This scheme was launched March 2004. Please see the chart below for the one, two, three and five years annualized returns from this scheme. The minimum investment in the scheme is Rs 5,000. The asset allocation of the portfolio is 24% equity, 72% debt and 4% cash equivalent and others. Please see the chart below for the monthly dividends declared by the scheme, on a per unit basis, over the last 5 years.   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 mai...

Franklin India Smaller Companies Fund - Invest Online

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   Franklin India Smaller Companies Fund   While the universe of small-cap stocks in India is vast, there are very few equity funds which take on the task of sifting through this space for good long-term bets. Franklin India Smaller Companies Fund has managed this with aplomb. What we like about this fund is its significant out-performance of its category and benchmark over the last four years, and its ability to moderate portfolio risk despite investing in the riskiest segment of the equity market. This fund's stock selection strategy, like that of Franklin India Prima Fund is focused on finding companies that generate positive cash flows across business cycles. High return on investment and manageable leverage are also filtering criteria. Says R. Janakiraman, fund ma...

How to open a Capital Gains Account?

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   How to open a Capital Gains Account? You can open a capital gains account in an authorized bank. The Government has notified 28 banks which can open the Capital Gains Account on behalf of the Government. You have to apply for opening the account by filling out the required application form (Form A) and submit proof of address, PAN card and photograph. You cannot withdraw funds from a capital gains account using a cheque book or ATM, like you do in your normal savings bank account. There are procedures to be followed to withdraw funds from the capital gains account. Investment in Specified Bonds Section 54EC of Income Act provide that if the seller invests whole or part of capital gains arising from the sale of asset in specified Capital Gains, within a period of six months of the ...
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