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

Birla SunLife Manufacturing Equity Fund

The Make in India program was launched by Prime Minister Naredra Modi in September 2014 as part of a wider set of nation-building initiatives. It was devised to transform India into a global design and manufacturing hub. The primary motive of the campaign is to encourage multinational as well domestic companies to manufacture their products in India. This would create more job opportunities, bring high-quality standards and attract capital along with technological investment to bring more foreign direct investment (FDI) in the country.   Why India as the next manufacturing destination?   The rising demand in India along with the multinational's desire to diversify their production to include low-cost plants in countries other than China, can help India's manufacturing sector to grow and create millions of jobs. In the words of our Honourable Prime Minister- Mr. Narendra Modi, India offers the 3 'Ds' for business to thrive— democracy,...

Total Returns Index brings out real Equity Funds Performers

From February, equity mutual funds have to change their benchmarks to account for dividend payments. Until now, funds used price-based benchmarks alone. TRI or total return indices assume that dividend payouts are reinvested back into the index. What this does is lift the overall index returns, because dividends get compounded. For example, the Sensex TRI index will consider dividend payouts of its constituent companies while the Nifty50 TRI index will consider dividends of its constituents. Using TRI indices as benchmarks comes on the argument that an equity funds earn dividends on the stocks in its portfolio, which they use to buy more stocks. Therefore, using an index that also considers dividend reinvestment would be a more appropriate benchmark. Shrinking outperformance With a stiffer benchmark, it is obvious that the margin by which an equity fund outperforms the benchmark would shrink. Rolling one-year returns from 2013 onwards, the average margin by which largecap funds out...

Stock Review: Havells

HAVELLS India's stock performance has been muted in the past three months, in line with the weak broader market. But, given the turnaround in its overseas subsidiary and the launch of new products in its consumer durable business, the company's stock may undergo a re-rating.    Havells is India's leading consumer electrical goods company, with consolidated sales of . 5,527 crore in the past four quarters. Its wholly-owned subsidiary Sylvania, which makes lighting and fixtures, has established brands in European, Latin American and Asian markets. Sylvania repre sented nearly half of the company's consolidated revenues in the first half of FY11.    Sylvania's poor financials hit Havells' consolidated performance in FY10. But, this has changed in the cur rent fiscal. Havells has reduced fixed costs of Sylvania by exiting from unprofitable businesses and outsourcing manufacturing to low-cost locations such as India and China. In the September 2010 quarter, Sylv...

Kisan Vikas Patra - KVP

  Kisan Vikas Patra (KVP) First launched in 1988, the Kisan Vikas Patra (KVP) is one of the premier and popular saving scheme offering from the Indian Postal Department. This product has had a very chequered history- initially successful, deemed a product that could be misused and thus terminated in 2011, followed by a triumphant return to prominence and popular consumption in 2014. The salient features of KVP are as follows- The grand USP- Money invested by the applicant doubles in 100 months (8 years, 4 months). KVPs are available in the following denominations- Rs.1000, Rs.5000, Rs.10,000 and Rs.50,000. The minimum purchase value for the KVP is Rs.1000. There is no maximum limit. KVPs are available at all departmental post offices across India. These certificates can be prematurely encashed after 2 ½ years from the point of issue. KVPs can be transferred from one individual to another and from one post office to another. ----------------------------------------------------- Inve...

How to generate a UAN Online

Best SIP Funds Online   In order to make Employees' Provident Fund (EPF) accounts portable, the Employees' Provident Fund Organisation (EPFO) had launched the facility of Universal Account Number (UAN ) in 2014. Having a UAN is now mandatory if you have an EPF account and are contributing to it. So far, you got this number from your employer and every time you changed jobs, you had to furnish this number to the new employer.  However, in order to make it easier for you to get a UAN , and without your employer's intervention, the EPFO now allows you to go online and generate a UAN on your own. This facility can be used by freshers, or new employees, who are joining the workforce as well as by employees who have older EPF accounts but do not have a UAN as yet. As a new employee, you can simply generate a UAN and provide the number to your employer at the time of joining, when you need to fill up forms for your EPF contribution. As per a circula...
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