Skip to main content

Debt Mutual Funds are good Investments during these Volatile Times

In India, it is still the institutional investors who mostly invest in fixed income mutual fund products. Retail investor participation in this asset class through mutual funds is negligible. This is counter intuitive considering the vast amount of savings that the Indian investors have in bank fixed deposits. If one looks at the asset allocation pattern of Indian retail investors, it is evident that Indians are predominantly fixed income investors by nature and convention. This anomaly is clearly an opportunity for the mutual fund industry.


In terms of diversity of product offerings, the industry has come a long way. Debt mutual fund products come with different permutations of liquidity (or tenors), credit quality and interest rate-related volatility to address various investment requirements based on an investor's investment objective, risk appetite, and time horizon. The product bouquet encompasses liquid and ultra shortterm funds, which invest in money market securities; fixed maturity plans that invest in securities matching the scheme tenure so as to lock in the yield prevailing at that time; income and gilt funds; capital protection-oriented schemes; and a vast offering of hybrid products with different combinations of equity and debt.

The industry needs to invest in increasing awareness among retail investors so that they can take advantage of a wide array of useful products. The product offerings in debt space today are multifold and designed for retail as well as institutional investors — right from avenues such as gilt funds, which typically provide returns in the form of capital appreciation and interest income by investing in government securities of varying maturities, to various short-term investment avenues such as FMPs designed to lock in yields by buying and holding papers of similar maturity, and shortterm and ultra short-term funds, which are more accrual based meant for short-term deployment of funds. At the same time, we have category of funds known as the monthly Income plans that seek to provide regular income through dividends.

While mutual fund as an investment category cannot guarantee returns, the other aspects of investor's reservation can be dealt with by creating awareness towards debt as an avenue towards safety, liquidity and returns. In this reference, I would like to draw reader's attention to the second half of 2008, which has been known more for the collapse of the global financial system. If one were to look at the returns generated by some of the debt mutual funds during this period, one would certainly be surprised. The point that I am attempting to make here is that different asset classes have outperformed at various points of time, and with the ever-changing investment environment, each asset class will have some uniqueness to offer to an investor's portfolio. This point is especially significant in the current scenario when investors are primarily looking at safety of investment and predictability of returns. They could, therefore, consider debt mutual fund as an investment option.

To sum it up, each asset class has its pros and cons and its suitability would be a function of the prevailing market environment as well as investor's specific situation. In the current context, retail investors can lock in investments at attractive yields by investing in FMPs or open ended mid-market schemes like short-term and regular saving funds. Investors who can take some volatility and have a horizon of two years or more can also look at doing an SIP in income funds between now and March 2012.

With the current volatility in the capital markets, investors can also use debt funds to even temporarily park their investments and switch to equity-oriented funds in a systematic basis.
 

Popular posts from this blog

What are the factors affect the changes in Interest Rate of Fixed Deposits?

  What are the factors affect the changes in rate of Fixed Deposits? Fixed Deposits are now considered to be a very old fashioned method of saving, but still attract many investors since they have guaranteed returns at the end of the tenure of the investment at a decent interest rate. There are various factors that affect the rates of interest for a Fixed Deposit. Policies of the Reserve Bank of India   - The several norms and restrictions posed by the Reserve Bank of India , in order to gain optimum control over credit and inflow and outflow of fund throughout the country. The repo rate changes, cash reserve ration tends to change and these changes affect the banking products like Fixed Deposits, loans etc. Recession   - When unemployment in a country crosses the benchmark set Recession hits, and slowly the country faces an economic slow movement, affecting the purchasing power of the people in the country, forcing the Reserve Bank of India to release more funds in the financial marke...
Read more

Understanding Your Cibil Credit Information Report

   WE ARE all familiar with the anxiety and uncertainty that we feel when applying for a loan. After all, it's the lender who decides whether we can own our dream home, our first car, or whether our children can pursue higher education. In a nutshell, a better life depends on the lender's decisions.    While other factors do play a part in the lender's decision, the Cibil Credit Information Report ( CIR ) plays a crucial role in a lender's decision to approve a loan application.    Previously, lenders would treat all loan seekers equally. Each applicant, if approved by the lender's internal credit policy, would be charged at the same interest rate for a particular loan size and purpose. The lenders would charge a higher interest rate to all the borrowers, in order to compensate for the possible default of a small portion of the loan disbursed. In other words, it's like a professor (the lender) punishing an entire class (borrowers) for the mischief played b...
Read more

Capital Protection Oriented 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   Capital Protection Oriented Funds   Erosion of capital is one of the key concerns for investors wanting to invest in equity mutual funds. To address this concern, asset management companies have launched Capital Protection Oriented Funds (CPOFs). What are CPOFs? CPOFs are generally three to five-year, closed-ended funds where 70-80% of the portfolio is invested in fixed income securities, which mature on or before the scheme's tenure. The investment in fixed income securities grows to 100% at the end of the tenure, providing the investor with capital protection. The remaining portion (20-30%) is used to take exposure to equity, which provides the upside. Exposure to equities is either by directly buying equity stocks (plain vanilla CPOFs) or by b...
Read more

Mutual Fund Review: ING Dividend Yield

  ING Dividend Yield's small assets enable the fund manager to churn in impressive returns… Strategy The aim of the fund is to invest in stocks which offer a high dividend yield. This fund deploys a value based strategy which aims to gain from investing in fundamentally strong and free cash flow generating businesses. The scheme focuses not only on growth but also on the cash generated by the business, which mostly leads to stable returns even in volatile markets. This fund has a low volatility because of its investment in high yielding stocks. The scheme tries to include stocks that yield dividend above the dividend yield of the Nifty and stocks with liquidity, which throws up a universe of 150 stocks.   Our View Launched in October 2005, this fund invests at least 65 per cent of its assets in high dividend yield stocks. The fund has consistently maintained a mix of stocks across varying market capitalisation, with a higher tilt to mid caps compared to small caps. Howev...
Read more

SBI Small Cap Fund

SBI Small Cap Fund scheme seeks to provide investors with opportunities for long-term growth in capital along with the liquidity of an open-ended scheme by investing predominantly in a well diversified basket of equity stocks of small cap companies. SBI Small Cap Fund has widened its margin of outperformance relative to its category and benchmark in the last one year, earning itself a five-star rating. The fund shows a hefty 18 percentage-point outperformance relative to its peers in the last one year, 5 percentage points over three years and 4 percentage points over five years. Needless to say, it has also outpaced its benchmark to deliver convincing five-year annualised returns of 37 per cent. A believer in the credo that a small market cap does not reflect business quality, the fund looks for five attributes in the stocks it buys: competitive advantage, return on capital, growth, management and valuation. SBI Small Cap Fund is among the few in this space to remain at quite a man...
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