Skip to main content

Mutual Fund that act as a Zero Coupon Bond

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

 

A Fund which act as a Zero Coupon Bond

There is no direct way for Indian investors to simply buy and hold gilts. Here's a fund which attempts to enable that with superior tax efficiency than gilts

Sometimes, the simplest investments are also the best. For a few months now, gilts in India have offered investors an attractive buying opportunity. Gilts are government-guaranteed and carry no credit risk. With their yields hovering at 8.5 to 9 per cent, they also offer the opportunity to lock into high interest rates and profit from any future gain in prices, if interest rates fall. With inflation coming off quite sharply in recent times and global risks settling down, most people think this is the top of the rate cycle and expect the RBI to start cutting interest rates next year.

 

But the problem for Indian investors is, there is no direct way to simply buy and hold gilts.

 

Mutual fund houses run gilt funds which actively trade on gilts of differing maturities. But these carry an interest rate risk as the fund may lose money as it switches in and out of gilts. Fixed maturity plans offer one way out, but if held for less than 3 years, their returns are taxable at one's income tax slab rates. Tax-free bonds from corporates are another option, but there's no supply of them now and the interest on them is paid out every year. So you don't gain from compounding.

As fund houses grapple with different solutions to this problem, there's an interesting one from Tata Mutual Fund. The fund house has repositioned its Gilt Mid Term Fund to deliver the gains of buying and holding long-term gilts to investors. The fund's investment strategy goes thus.

 

It divides its portfolio into equal halves, investing one half in the gilt maturing in 2022 (8 years hence) and another half in the one maturing in 2027 (13 years hence). The fund house has hit upon this strategy instead of directly buying 10-year paper, because it is more cost effective for investors. You typically end up losing 20-30 basis points on the liquidity premium on ten-year paper and that impacts returns.

 

This strategy allows the fund to lock into the current high interest rates of 8.5-8.6 per cent on these gilts. The fund will thus earn regular income on these gilts and keep re-investing them in the fund, so that your returns can compound over the next 6-7 years. (Tax-free bonds don't allow you to do this). The fund plans to buy and hold these gilts until they mature. If interest rates spike over the next one year, yes the NAV may fall, but investors in the fund can avoid rate risk by holding on for the long term say 6 years or so. As the fund itself plans only on a buy and hold strategy, it will not suffer capital losses from such a spike in rates.

 

Though the fund is open ended and may face inflows or inflows, the two g-secs are liquid enough to provide both buying and selling opportunities.

 

However, interest accruals are just one part of the story. If interest rates decline from their present highs over the next three years or so, as most people expect them to, the fund will make gains from rising gilt prices adding to the returns. The fund comes at a modest expense ratio, charging only 0.35 per cent of the NAV for Direct investors and 1.1 per cent for those who buy through a distributor.

 

Overall, the fund house expects that, if this fund is held for over 6 years, investors can reap benefits of both the high yields and capital gains, if there are any. Because of regularly re-invested interest, you get the benefits of a 6.5 year zero coupon bond (a bond which offers you a discount on purchase instead of regular interest payouts).

So whom will the fund suit?

·         Investors who have a financial goal coming up in 6 years-plus

·         Investors retiring in 6 years' time. They can even set up a systematic withdrawal plan to derive regular 'income' from the fund at maturity

·         Investors who want a long-term, low maintenance debt option, without credit risk and low rate risk


For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

Leave a missed Call on 94 8300 8300

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

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

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

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

Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Franklin India Bluechip
      4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds Invest Online

      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
      4. Birla Sun Life Front Line Equity Fund
      5. Franklin India Prima

C. Mid and SmallCap Funds Invest Online

      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
      5. Birla Sun Life Dividend Yield Plus
      6. SBI Emerging Businesses Fund
      7. HDFC Mid-Cap Opportunities Fund
      8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds Invest Online

      1. DSP BlackRock MicroCap Fund
      2. Franklin India Smaller Companies

E. Sector Funds Invest Online

      1. Reliance Banking Fund
      2. Reliance Banking Fund
      3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

      1. DSP BlackRock Tax Saver Fund
      2. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds Invest Online

      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund
      4. Birla Sun Life Gold

H. International funds Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

Popular posts from this blog

Franklin India High Growth Companies Fund

Franklin India High Growth Companies Fund Online One of the key developments that the Street is keenly waiting for is a cut in interest rates by Reserve Bank of India . With demand rising gradually, a rate cut is expected to boost earnings growth for companies. In such a situation, schemes which invest in high growth companies are best suited, especially when seen from a long-term perspective. One such scheme is Franklin India High Growth Companies Fund. Fund managers Anand Radhakrishnan, Roshi Jain and Srikesh Nair strictly follow valuation parameters when it comes to choosing stocks.Valuation parameters, such as enterprise value, price-to-earnings growth ratio, forward price-to-sales ratio and discounted earnings per share, play a critical role in selecting companies for investments. Taking into account these parameters, the fund managers invest in companies which are poised for high growth in their respective sectors. This approach has been in favour of the scheme and it has perform...

Atal Pension Yojana contribution Tax Benefit for spouse

Contributions to Atal Pension Yojana (APY) are eligible for the same tax benefits as the NPS. This means that the contributions can be claimed under Section 80CCD (1B). The current limit for Section 80CCD (1B) is   Rs   50,000, over and above the   Rs   1.5 lakh limit under Section 80C. Section 80 CCD (1) is a different one, meant to cover employers' contribution towards NPS . You cannot get tax benefit by investing in the name of your spouse under Section 80 CCD . ------------------------------ ----------------- 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 2016 Best 10 ELSS Mutual Funds in India for 2016 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. ...

Mutual Fund Exit Load Changes

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 Fund Exit Load Changes AMCs don't communicate about any change in exit load directly with investors, but do update on their website   The exit load applicable to your investments is the load which existed at the time when you invested in the particular fund. Any subsequent changes in the exit load will not be applicable to your investments.   However, Asset Management Companies ( AMCs ) periodically publish addendums in the newspapers, which state any change in exit loads of specific schemes managed by them. Such changes are also posted on their websites. However, a direct communication to an investor is not made, considering the costs involved in doing so. In their own interests, investors should not only track the performance of the funds they i...

Debt Mutual Fund Dividends are Taxable

DDT is deducted when a non-equity fund declares dividends. Equity and balanced fund dividends are tax-free The AMC is correct to deduct the dividend distribution tax (DDT) as it is mandated by tax laws. DDT in mutual funds is deducted every time a non-equity fund declares dividends. Equity fund and balanced fund dividends are tax-free . It is possible that you have invested in a non-equity fund for the first time or have received the dividend under a non-equity fund for the first time. That is why this is the first occasion when you have come across DDT.   The rate at which non-equity schemes deduct DDT has also gone up after the July 2014 budget. This is due to a change in calculation methodology. Earlier, if the fund has to declare a dividend of R 100, it used to make a provision for R 128.3, paying R 28.3 to the taxman and distributing the balance to the investor. This allowed the investor to bear less tax since the effective tax rate was 22.07 per ce...

Avoid NFOs

  Don't get taken in by the flurry of new fund offers. You will be better off sticking to the tried and tested schemes.   For the past one year, to cash in on the bull run in equities, mutual fund houses have gone on a new fund offer (NFO) overdrive. But experts are unanimous in their advice: avoid NFOs . While past performance is not an indicator of how a fund will fare in the future, it does tell the investor how skilful the fund manager is. This crucial information is missing in an NFO. Not only is there no track record to judge an NFO by, many NFOs are similar to funds that already exist. If the new fund is similar to existing funds, you are better off investing in the latter. Around 67% of the new launches in 2014 were closed-end products. Investing in the NFO of a closed-end fund is doubly risky. In case the fund's performance is lacklustre, a closed-end fund does not allow you to exit. Even though closed-end funds are listed on the stock...
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