Skip to main content

Debt Mutual Funds are not Risk Free

When it comes to debt investments there seems to be an acute aversion to any sort of volatility among investors. But that need not be the case. In the current market bond yields have seen movements of as much as 100 basis points within a month. There are chances that many investors may want to redeem their debt funds fearing fall in their returns. But what may happen is that investors may miss out on potentially improved returns at portfolio level due to lack of adequate planning.

Today mutual funds offer a number of different types of debt funds that cater to the investment requirement across the segment. As a thumb rule, the longer the investment horizon, the better is one's ability to withstand intermediate volatility and, thereby, enhance expected return.

Understanding price-yield movement

A basic fundamental of bond investing that yield and price are inversely related may not be commonly understood. Therefore it is important that investors take efforts to educate themselves to understand the product before taking the investment decision.

A simple way of understanding debt funds is to think of them simply as passing through the interest and capital gain income that they receive from the bonds they invest in, after deducting expenses and fees. There are a couple of further complexities to this.

One, unlike fixed deposits, mutual funds invest in bonds that are tradable. Two, in the debt market, prices of different bonds can rise or fall, just like they do on stock markets. Debt market focuses on various parameters such as global market development, interest rate cycles, inflation and credit pick-up. Bond prices are affected by the interest rate cycles and policy stance of central banks.

Don't panic if yields move up

Some investors withdraw untimely from debt funds because fear of loss is irrationally higher; the perception that the debt market does not witness volatility leads to panic when there is an upward movement in yields, adversely impacting returns during that period.

In current scenario no economy can sustain being standalone, therefore development in one part of the world is naturally going to affect the linked economy. Like in every other asset class, investors need to show patience in this asset also. An investor with long-term horizon should remain invested to benefit the most from the interest rate cycle.

Choose the right kind of fund

An investor should build his/her debt portfolio keeping in mind the time horizon and risk profile and invest in fund strategy matching their investment need.

Debt funds can broadly be categorised in the following three groups:

(1) For short-term investment-Liquid Fund/Low Duration Funds

(2) For medium term investment, defined as 18 months to three years – Short Term fund/Credit Risk Funds

(3) For long-term investment horizon of over three years – Bond Funds

Generally speaking, risk matrix in debt funds is measured on two major counts. Firstly, the average maturity of the fund's investments and secondly the average credit profile of the fund. Higher the average maturity, the more volatile and risky is a fund considered and similarly, the lower the rating profile of a fund's investment, the more risky is it considered.

Longer maturity risk is normally due to fluctuation in bond prices and is considered recoverable over long periods. Credit risk is typically binary in nature, where if the investee company defaults in repayments on due date, the subsequent recovery is generally unlikely.

Kinds of debt funds

Liquid Funds, typically invest in papers of maturity up to 91 days. Investors with very short- term horizon should consider such funds, especially for creating an emergency fund corpus (which should be ideally three to six months income).

Low-duration fund can have average Macaulay duration of six to 12 months. If investor has investment horizon matching the above, this category may suit them. Short-duration funds typically have maturity between one and three years. Credit risk funds generally invest in lower rated papers to capture higher carry yields. Such funds may suit medium term investors.

Bond funds typically can invest in long-term papers. Due to higher average maturity, typically, returns are very volatile and highly sensitive to change in interest rates. However, past experience suggests that over interest rate cycles, these funds in the long term have provided good returns. Hence, a long term investor should consider such funds.

Another way of managing the interest rate volatility is through Dynamic Bond Funds, which can increase or reduce their duration based on the interest rate outlook.

DEMYSTIFYING DEBT FUNDS

  • There are debt funds to match varying investment horizons  
  • Debt funds can also suffer losses like equity funds  
  • Key is to have patience and wait out the volatility


SIPs are Best Investments as Stock Market s are move up and down. Volatile is your best friend in making Money and creating enormous Wealth, If you have patience and long term Investing orientation. Invest in Best SIP Mutual Funds and get good returns over a period of time. Know which are the Top SIP Funds to Invest Save Tax Get Rich - Best ELSS Funds

For more information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

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...

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...

Perpetual SIP - Its Advantages

Retail investors have taken a fancy to investing in mutual funds through systematic investment plans (SIPs). As per industry estimates, Rs 4,000 crore flows into SIPs every month. One way to take advantage of SIPs in a true long-term manner is to opt for a perpetual SIP 1. What is a perpetual SIP? In an SIP , you make periodic investments in a mutual fund scheme of your choice generally every month for a pre defined tenure. While signing up an SIP mandate , you have the option to leave the end-date column blank. If the column is blank, it means the investor has opted for a perpetual SIP . Most fund houses assume this SIP will continue till December 2099 unless you give a written communication to stop it. However, some fund houses require you to tick the `perpetual option'. 2. What are the advantages of perpetual SIPs? Registering an SIP involves a lot of paperwork and it takes time. It is observed that many investors skip their SIP instalments when they go for short-tenure option...
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