Skip to main content

Understanding Risk in Debt Mutual Funds

Debt Mutual Funds Online



Investors have made double digit returns in certain categories of debt funds over the last one year.
Financial planners suggest that investors be aware of the risks involved in debt funds and how mutual fund (MF) managers help lower these risks

1. What is interest rate risk?
How could it impact debt mutual fund investors?


Interest rate movement poses a risk to debt MF investors.

Interest rates typically rise when the economy is growing, and fall during economic downturns.Bond prices and interest rates are inversely related. When interest rates rise bond prices fall and vice versa.Usually , longer the maturity , greater the degree of price volatility . Interest rate risk is present in all debt funds but the degree could vary . Gilt funds with longer maturity , carry higher interest rate while it is negligible or very low in liquid funds, which invest in securities of up to 91 days maturity .

2. How can credit rating of a company affect a debt fund?


A credit risk is the risk of default on a debt security that may arise from a borrower failing to make required payments. If a default were to happen in the security of a portfolio, it would impact the fund to the extent of its weight in the portfolio. Bonds are assigned a credit rating by agencies such as Crisil, Care and Icra based on their ability to finance debt obligations and their cash flows. A corporate bond with an AAA equivalent rating is considered of the highest quality with negligible risk of default on payment of interest and repayment. Recently , Amtek Auto was downgraded by rating agencies, which affected debt fund schemes that had the paper in their portfolio. The fund manager regularly evaluates credit rating changes in the portfolio.

3. How crucial is liquidity & concentration for debt funds?


Concentration refers to the proportion of holding in one specific bond, higher the concentration in a particular security, higher the risk. For example, if you hold a 10% exposure in a single security and if it defaults, the NAV (net asset value) of the fund would fall to that extent. The fund manager also has to ensure the scheme is liquid to the extent that the fund has the ability to move in and out of a scheme without impacting its value or price. He ensures the scheme is liquid to manage large redemptions without having an impact on the NAV of the scheme.





-----------------------------------------------
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 Saver Mutual Funds to invest in India for 2017

Best 10 ELSS Mutual Funds in India for 2017

1. BNP Paribas Long Term Equity Fund

2. Axis Tax Saver Fund

3. Religare Tax Plan

4. DSP BlackRock Tax Saver Fund

5. Franklin India TaxShield

6. ICICI Prudential Long Term Equity Fund

7. IDFC Tax Advantage (ELSS) Fund

8. Birla Sun Life Tax Relief 96

9. Reliance Tax Saver (ELSS) Fund

10. Birla Sun Life Tax Plan

Invest in Best Performing 2017 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

All about "Derivatives"

What are derivatives? Derivatives are financial instruments, which as the name suggests, derive their value from another asset — called the underlying. What are the typical underlying assets? Any asset, whose price is dynamic, probably has a derivative contract today. The most popular ones being stocks, indices, precious metals, commodities, agro products, currencies, etc. Why were they invented? In an increasingly dynamic world, prices of virtually all assets keep changing, thereby exposing participants to price risks. Hence, derivatives were invented to negate these price fluctuations. For example, a wheat farmer expects to sell his crop at the current price of Rs 10/kg and make profits of Rs 2/kg. But, by the time his crop is ready, the price of wheat may have gone down to Rs 5/kg, making him sell his crop at a loss of Rs 3/kg. In order to avoid this, he may enter into a forward contract, agreeing to sell wheat at Rs 10/ kg, right at the outset. So, even if the price of wheat falls ...
Read more

ICICI Prudential Balanced Fund

 ICICI Prudential Balanced Fund scheme seeks to generate long-term capital appreciation and current income by investing in a portfolio that is investing in equities and related securities as well as fixed income and money market securities. The approximate allocation to equity would be in the range of 60-80 per cent with a minimum of 51 per cent, and the approximate debt allocation is 40-49 per cent, with a minimum of 20 per cent. An impressive show in the last couple of years has propelled this fund from a three-star to a four-star rating. The fund has traditionally featured a high equity allocation, hovering at well over 70 per cent, which is higher than the allocations of the peers. But in the last one year, the allocation has been moderated from 78-79 per cent levels to 66-67 per cent of the portfolio. ICICI Prudential Balanced Fund appears to practise some degree of tactical allocation based on market valuations. Within equities, well over two-thirds of the allocation is parked i...
Read more

ING Mutual 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     Information Updated As On December 30, 2013   Name of the Mutual Fund ING Mutual Fund Date of set up of Mutual Fund February 11, 1999 Name(s) of Sponsor ING Group Name of Trustee Company ING Mutual Fund Name of Trustees Mr. Chetan Mehta - Associate Trustee Mr. Haresh M Jagtiani - Independent Trustee Mr. Sunil Gulati - Independant Trustee Mr. Surinder Mohan Pathania - Independent Trustee ...
Read more

Tax Planning: Income tax and Section 80C

In order to encourage savings, the government gives tax breaks on certain financial products under Section 80C of the Income Tax Act. Investments made under such schemes are referred to as 80C investments. Under this section, you can invest a maximum of Rs l lakh and if you are in the highest tax bracket of 30%, you save a tax of Rs 30,000. The various investment options under this section include:   Provident Fund (PF) & Voluntary Provident Fund (VPF) Provident Fund is deducted directly from your salary by your employer. The deducted amount goes into a retirement account along with your employer's contribution. While employer's contribution is exempt from tax, your contribution (i.e., employee's contribution) is counted towards section 80C investments. You can also contribute additional amount through voluntary contributions (VPF). The current rate of interest is 8.5% per annum and interest earned is tax-free. Public Provident Fund (PPF) An account can be opened wi...
Read more

Fortis Mutual Fund

Fortis Mutual Fund, a relatively new player, it is still to prove its case and define its position in the industry. In September 2004, it came onto the scene with a bang - three debt schemes, one MIP and one diversified equity scheme. And investors flocked to it. Going by the standards at that time, it had a great start in terms of garnering money. Mopping up over Rs 2,000 crore in five schemes was not bad at all. The fund house has not been too successful in the equity arena, in terms of assets. Though it has seven equity schemes, it is debt and cash funds that corner the major portion of the assets. Most of the schemes are pretty new, and the two that have been around for a while have a 3-star rating each. The last two were Fortis Sustainable Development (April 2007), which received a rather poor response, and Fortis China India (October 2007). Fortis Flexi Debt has been one of the better performing funds, after a dismal performance in 2005. It currently has a 5-star rating. None ...
Read more
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