Debt long funds returned the best versus gold exchange traded funds, or ETFs, and large-cap funds, yielding 8.65% annualised in the five-year period ended September 30, according to data from rating company Crisil.
Income fund returns look particularly attractive as they have come amid two rate cycles (hike and cut) in the past five years. With a twoto three-year time horizon, retail investors can invest one-third of their debt allocations, which can earn them 50-100 basis points higher than bank fixed deposits on an average. One basis point is one-hundredth of a percentage point.
While gold funds have returned only 6.43%, popular largecap funds that invested in blue chips, generated 8.24% annually, less than income funds.
In the five-year period, the Reserve Bank of India has raised and lowered the policy rate. The benchmark government bond yield rose as high as 9.47% in August 2013 pushing prices down while it dropped as low as 7.09% in May same year.
So far this year, the central bank has cut the repo rate, at which banks borrow shortterm money from RBI, by 125 basis points, with the benchmark yield hovering in the range of 7.53-7.60% in the last few days.
In the last five years there were two-three instances of sharp rate cuts, which has led to capital appreciation for investors.
Wealthy and institutional investors mostly invest in income funds to gain from that.
When it comes to income funds, fund managers invest in a combination of government and corporate bonds with the higher share going to sovereign securities.
With some increases in lowerrated corporate bond defaults, fund mangers are now raising allocations to government securities, dealers said.
Some of the most-suggested income funds include Birla Sun Life Dynamic Bond Fund, HDFC Income Fund, ICICI Prudential Long Term Fund, UTI Bond Fund and SBI Dynamic Bond fund.
Investors should opt for the growth option, where accumulated interest will earn the yield of the underlying security. Any investment in debtcredit fund beyond three years will be taxed as long-term capital gains. In a falling interest rate scenario, there will be an appreciation in net asset value.
An investor in bank fixed deposits will end up paying tax on interest income depending on the individual tax bracket.
Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015
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6.Franklin India TaxShield
7.Canara Robeco Equity Tax Saver
8.IDFC Tax Advantage (ELSS) Fund
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10.BNP Paribas Long Term Equity Fund
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