Skip to main content

Long Term Income Funds

Investing Long Term Income Funds Online
 
 
Long Term Income Funds are better investment options than FDs over a 3 year horizon
 
Debt Funds article in Advisorkhoj - Long Term Income Funds are better investment options than FDs over a 3 year horizon
 

A vast majority of risk averse investors prefer bank fixed deposits to debt mutual fund schemes. Perception of risk and lack of financial awareness are the contributing factors. For investors who are willing to sacrifice the comfort of guaranteed returns, long term income funds are better investment options than fixed deposits over a tenure of three years or more. While banks have offered around 8.5 – 9% interest rates for a 3 year term deposits, top long term income funds have given returns of 9.5 – 10.7% over the last 3 year period. Further over tenures of three years or more, debt funds enjoy tax advantage over fixed deposits due to the long term capital gains tax with indexation. If we add the difference in pre-tax returns and the tax benefit, the post tax returns of long term income funds has been substantially higher than the bank fixed deposits.

Returns of top long term income funds

Over a three year tenure top performing long term income funds have given 1.5 – 2% higher returns compared to fixed deposits. On 1 lac investment the returns from income funds over a three year investment horizon would be 2,000 to 6,000 higher compared to fixed deposits on a pre-tax basis. On a post tax basis the difference in returns will be even higher, as we will discuss later in the article. The chart below shows the trailing three year annualized returns of the top income funds.

Debt Funds - The trailing three year annualized returns of the top income funds

While the top long term income funds outperformed fixed deposits over three year tenure, these funds gave higher pre-tax returns than fixed deposits even in the last 12 months, despite prevailing high interest rates. The chart below shows trailing one year returns of the top income funds.

Debt Funds - Trailing one year returns of the top income funds

Outlook for Long Term Income Funds

We have been in the grip of high interest rates for a long time due to stubborn inflation. However inflation has been easing over the past four months. In September inflation was 6.7%. Some bond market operators are expecting the RBI to cut rates as early as December, but the majority of economists are of the view that RBI will start cutting rates in February 2015. The 10 year Government Bond yield has started inching down from historical high levels. It is now at 8.3% compared to 9% at the beginning of the year. That is why we have seen the long term income funds giving good returns in the last one year.

Debt Funds - Outlook for Long Term Income Funds

The 10 year Government Bond yield is expected to fall to 7% in FY 2015 – 2016. Bond prices have an inverse relationship with interest rates. As interest rate goes down bond prices increase, leading to higher potential returns from long term income funds over the next 2 to 3 years. When we move to benign interest rate environment, the returns of long term income funds can potentially be even higher than the recent short term returns.

Income Funds are not risk free

It is important that investors understand that income or debt funds are not risk free. It is equally important that investors understand the nature of the risk, so that they can make an objective investment decision, without being swayed by perceptions. There are three kinds of risk that income or debt funds are exposed to.

  • Interest Rate risk: If interest rate goes down bond prices and returns will increase. Conversely, if interest rate goes up bond prices and returns will decrease. In the context of India's macro-economic outlook and the interest rate environment, the probability of interest rate going up is very low.

  • Re-investment risk: If the bonds in the income fund portfolio mature and the proceeds are re-invested in lower yield bonds, then the returns will decrease. Re-investment risk is lower if the average maturity of the bonds in the portfolio is longer. Long term income funds typically have longer maturity bonds in their portfolio, as we will see in the table below.

  • Credit risk: Credit risk relates to the risk of default. If the credit rating of the bond worsens the bond price will decline and the returns will be lower. As far as credit risk is concerned, the top long term income funds have high quality bonds in their portfolio, as we will see in the table below.

Debt Funds - Credit risk

Tax Benefit

Some significant taxation changes were made for debt funds in the last Budget. The holding period of long term capital gains is now 3 years. If the holding period is less than 3 years, then the returns will be taxed as per the income tax rate of the investor. If the holding period is more than 3 years, long term capital gains tax of 20% will apply. However, indexation benefits are allowed for calculation of long term capital gains. Fixed Deposit interest, on the other hand, is taxed as per the income tax rate of the investor, irrespective of the holding period. Indexation benefit reduces long term capital gains tax significantly. Therefore for tenures of 3 years or more, income funds have a significant tax advantage over fixed deposits, especially for investors in the higher tax bracket.

Let us see the difference between post tax returns of a long term income fund and fixed deposit with the help of an example. Let us assume you invested 1 lac in UTI Dynamic Bond Fund on November 1, 2011. Let us see how your post tax returns compare with a 1 lac investment in fixed deposit at 9% interest over the same tenure.

Debt Funds - Difference between post tax returns of a long term income fund and fixed deposit

Conclusion

In this article, we have seen how long term income funds are better investment option than fixed deposits over tenures of three years or more, for investors who are willing to sacrifice the comfort of guaranteed returns. Investors should consult with Prajna Capital if long term income funds are suitable for their investment portfolio.

-----------------------------------------------
Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds

Top 10 Tax Saving Mutual Funds to invest in India for 2016

Best 10 ELSS Mutual Funds in india for 2016

1. BNP Paribas Long Term Equity Fund

2. Axis Tax Saver Fund

3. Franklin India TaxShield

4. ICICI Prudential Long Term Equity Fund

5. IDFC Tax Advantage (ELSS) Fund

6. Birla Sun Life Tax Relief 96

7. DSP BlackRock Tax Saver Fund

8. Reliance Tax Saver (ELSS) Fund

9. Religare Tax Plan

10. Birla Sun Life Tax Plan

Invest in Best Performing 2016 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

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

Popular posts from this blog

ICICI Pru Mutual Fund Dividend

ICICI Prudential Mutual Fund has announced dividend under the following schemes: Scheme Dividend ( Rs /unit) ICICI Pru Capital Protection Oriented Ser V Plan B-D 0.03611325 ICICI Pru Capital Protection Oriented Ser V Plan B Direct-D 0.03611325 ICICI Pru Balanced Advantage Direct-DM 0.06 The record date has been fixed as February 08, 2017. ------------------------------ ------ Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund Invest in Best Performing 2017 Tax Saver Mutual Funds Online Invest Best Tax Saver Mutual Funds Online Download Top Tax Saver Mutual Funds  Application Forms For further information contact  SaveTaxGetRich on 94 8300 8300 ------------------------------ ------ Leave y...

What is Financial Freedom?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India)     There were many things common between our Freedom fighters. All had the Single vision (Free India), common goal (independence) and had a disciplined and focused approach. They were ready to do anything and everything and had made so many sacrifices to see India free . But the road to freedom was not easy .They had faced lot many hardships, went to jail so many times and even confronted physical and mental torture from the British. There was one more thing which proved to be an advantage to our fighters that most of them were professional lawyers. The knowledge of legal issues and its impact on our country at large has helped them counter various bills and proposed new laws by the then government. It is due to their continuous effort that we are able to achieve the goal of Independent Indi...

Hidden Bank Fees

  What Banks Hide From Customers Imagine after a peaceful and exciting holiday you receive your bank statement with steep charges. You then rush to your bank and start confronting staff members and to your dismay, you come to know that the high end debit card was charged very heavily. Wouldn't this cause damage to your finances? So remember, the world outside is full of deceptive and double cheating people. Unethical practices are always used by company sales person in order to meet the target. Credit card companies, mutual funds and bank institutions always play dirty tricks to lure customers and the practices are rampant. So here's how you should be careful while dealing with your banks: High End Debit Card Charges While opening an account with a bank you opt for a debit card with minimal charges. But later on when you upgrade your card and opt for high end debit card the annual charge rise by a good amount. Though such a card has slew of features but it all comes at a high ...

Partial withdrawal from PPF

  Public Provident Fund (PPF) account has a lock in period   If you opened a PPF account to meet your retirement needs,, think twice about withdrawing from this fund before retirement. But provided it's an emergency here are the rules. Public Provident Fund (PPF) account has a lock in period before which you cannot withdraw your money.   The partial withdrawal is allowed after the completion of 6 financial years . This means that you will be allowed a partial withdrawal from 1 April 2017. The maximum partial withdrawal allowed is the least of the following: 50 percent of the account balance at the end of fourth financial year, 31 March 15 50 percent of the account balance of the end of previous financial year, 31 March 17.   There's a loan option available on your PPF account between the fourth and the sixth financial year. You can obtain a loan of up to 25 per cent of the balance in your account. However, this will attract interest of 2 percent more than the prevailing ...

Updating a minor PAN card upon becoming adults

  Updating a minor's PAN card once they become adults A PAN card issued in the name of a minor does not contain the minor's photograph or signature, and therefore, cannot be used as a valid proof of identity. Once a minor PAN card holder turns 18, the relevant changes must be made in the PAN records. A new card is then issued bearing a photograph and signature. Application The applicant is required to fill up the "Request for new PAN card andor changes or correction in PAN data" form. The form can be filled up online by accessing NSDL's Tax Information Network website and clicking on the online PAN application tab. Information The applicant must mention the existing PAN number in the application and check the `photo mismatch' and `signature mismatch' boxes, and submit the online form. The form must also be printed out, signed by the applicant, and submitted along with two photographs. Documents Identity and address proof in the form of a copy of the app...
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