Skip to main content

Now, Short-term Debt Mutual Funds Offer Good Returns



Short-term interest rates are currently elevated and the yield curve is likely to remain pressured, driven by higher inflationary expectations. The long-term interest rate scenario is uncertain, given the rapidly changing macro factors – both local and international, with the key variable being crude prices and their impact on the fiscal situation. This provides an ideal backdrop for investing in short term debt funds.


As the name suggests, short term debt funds or short duration funds are mutual fund products investing in debt securities that lie at the shorter end of the maturity spectrum. More specifically, these schemes predominantly invest in debt securities with maturities ranging from three months to about 18 months. Accordingly, these products are positioned between liquid funds, which invest in short-term liquid money market instruments with maturities of up to 91 days and medium to long-term debt funds, which invest in long-dated securities (instruments with maturities that are typically between three and 10 years). The average maturities of short-duration funds range from 0.60 to 1.5 years and depend to a large extent on fund managers' rate views as well as the prevailing shape of the yield curve.

Two-Pronged Benefit

Investing in short-duration funds enables an investor to benefit from regular coupon accruals. Further, since these funds have a lower average maturity than income (bond) funds, the returns volatility tends to be minimal in a rising, uncertain interest rate environment. On the flip side, if rates trend downwards, investors stand to benefit from the Expert Take possibility of capital gains, in addition to the coupon accruals.

Elevated Yield Curve

Given the tight monetary stance adopted by the RBI and the underlying tight liquidity scenario, the yield curve for most of fiscal 2011 was inverted. So effectively, shortend rates (ie, yields on products with maturities of up to 12 months) traded at higher rates than similar instruments with maturities of 3, 5 and 10 years. For instance, at present a 12-month CD trades at around 9.80% while a 10 year triple-A-rated corporate bond is traded at 9.20%.


Accordingly, short-duration funds present investors with the prospect of leveraging the elevated rates at the short end of the curve, given the uncertainty in the long term rate scenario.

Hazy Interest Rates Horizon

Currently, there is uncertainty over the long-term interest rates. The market expects the RBI to further raise rates to tame the rising inflation. As things stand, inflation came in at 8.98% for March. This was well above the expectations of around 8.38% and higher than the RBI's own target of 8% for the end of fiscal 2011.


In the medium-term, too, inflation expectations are high as the market anticipates the secondary impact of fuel prices on the back of rising crude oil prices. Over the last four months, oil prices have risen by 30% and the impact will be felt with a lag once the government passes on the burden to the economy.
Due to the prevailing high inflation, the RBI is expected to hike interest rates until inflation expectations and inflation itself come under control. As inflation and credit growth remain high, liquidity could be under strain in the coming months, which would also exert upward pressure on the rates. Given this backdrop, the long-term interest rate outlook is fluid. In addition, the government has only just begun its GSec auctions for FY 2011-12.

Best Of Both Worlds

Given the combination of currently high coupon rates and the uncertain interest rate outlook, short term debt funds offer you the best of both worlds – mitigated volatility and attractive coupon income.

 

Popular posts from this blog

Save Tax With Mutual Funds

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       Mutual funds are ideal as long term investment avenues for retail investors. To encourage investments in this avenue, the Government of India offers investors a spate of tax benefits thus ensuring maximum benefit from mutual funds held beyond a year. Sample some of the key benefits and refer to the table for a detailed list of tax rates for different types of schemes ·        Avail deductions under Sec 80C of the Income Tax Act by investing up to a maximum of Rs. 1 lakh in designated Equity Linked Savings Schemes (ELSS). Such investments have a compulsory lock in period of 3 years. ·        First time retail investors in equity with a gross total income of up to Rs. 12 lakh can invest up to Rs. 50,000 in specific MF schemes un...

How much to invest in gold ?

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds Call 0 94 8300 8300 (India) Let your motivation dictate the share of the yellow metal in your portfolio Enough has been said and written about gold as an investment option. The latest argument is that the craze for gold among Indian households is endangering our country's balance of payments. The policymakers are busy trying to find ways of discouraging investment in gold, but if households keep the common good in mind, they would be paying the market price for gas cylinders as they do for, say, their mobile phone bills. After all, private decisions are driven by private motives. So, how should a household look at gold from its own perspective? Gold is primarily acquired for its merit as a store of value. Even if the worst crisis hits a family, the gold that it holds could be put to use anywhere in th...

LIC's JEEVAN SHIKHAR

  LIC's Jeevan Shikhar is a participating, non-linked, saving cum protection single premium plan wherein the risk cover is ten times of Tabular Single Premium. The proposer will have an option to choose the Maturity Sum Assured. The premium payable shall depend on the chosen amount of Maturity Sum Assured and age at entry of the life assured. This plan also takes care of liquidity need through its loan facility. The plan will be open for sale for a maximum period of 120 days from the date of launch. 1.   BENEFITS   : a) Death Benefit: On death during first five policy years: Before the date of commencement of risk   :   Refund of Single Premium without interest. Single Premium mentioned above shall not include any extra amount if charged under the policy due to underwriting decision and taxes. After the date of commencement of risk   : "Sum Assured on Death" equal to 10 times the tabular single premium shall be payable. On death after completion of five policy years but b...

Investment Strategy - What is Sector Rotation Theory?

Buy Gold Mutual Funds Invest Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Call 0 94 8300 8300 (India)   The economy goes through cycles : it expands for a few years and then contracts. Study of historical data suggests that different sectors tend to perform well on the stock markets during different stages of the economic cycle. While history never repeats itself exactly, some broad patterns tend to recur. Investors can take advantage of the sector rotation theory to move their money from those sectors that have seen their best times to those that are likely to do well in future.   The person who developed the sector rotation theory is Sam Stovall, chief investment strategist at Standard & Poor's. He developed this theory by studying data on economic cycles going as far back as 1854 provided by the National Bureau of Economic Research ( NBER ) of the US.   When trying to correlate stock-market perfor...

Rajiv Gandhi Equity Savings Scheme (RGESS) set for launch this week

The finance ministry is set to notify the Rajiv Gandhi Equity Savings Scheme ( RGESS ) this week.   Though Finance Minister PChidambaram had approved on September 21, the scheme announced in this year's Budget, and had said that the revenue department will notify the scheme and the Securities and Exchange Board of India ( Sebi ) would issue relevant circulars within two weeks, it is yet to become operational.   A senior finance ministry official said the revenue department was expected to notify the scheme any day now to attract retail investors to the equity segment.   He added that Sebi was not required to issue any circular for the operationalisation of the scheme and that after the issuance of the revenue department's notification, investors would be able to avail of the benefits of the scheme.   The official accepted that implementation of the scheme had been delayed due to the deliberations on inclusion of mutual funds ( MF ) in it.   ...
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