All the friends here who land in highest tax bracket, Debt Mutual funds are attractive avenue for us....

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  • Five reasons to invest in debt mutual funds


    1) More liquid than FDs

    A debt fund is very liquid-you can withdraw your investments at any time and the money is in your bank account the next day. Unlike a fixed deposit, the fund house does not levy a penalty for exiting too soon. Some funds have an exit load if the investment is redeemed within 3-6 months. However, most debt fundsdon't levy a charge if the investment is redeemed after one month. Besides, you can make partial withdrawals, without having to break the entire investment. Also, the procedure for breaking a fixed deposit requires more paperwork than a click of a mouse.

    2) They are more tax efficient

    In the long term, debt funds are far more tax efficient than fixed deposits. After one year of investment, the income from a debt fund is treated as a long-term capital gain and is taxed at either 10% or at 20% after indexation. In indexation, the cost of investment is raised to account for inflation for the period the investment is held. The longer you hold a debt fund, the bigger is the indexation benefit. There is also no TDS in debt funds. In fixed deposits, if your interest income exceeds Rs 10,000 a year, the bank will deduct 10.3% from this income.

    If you are not liable to pay tax, you will have to submit either Form 15H or 15G to escape TDS. The other problem is that the income from fixed deposits is taxed on an annual basis. You may get the money after the deposit matures 5-6 years later but the income is taxed every year. In debt funds, the tax is deferred indefinitely till the investor redeems his units. What's more, the gains from a debt fund can be set off against short-term and long-term capital losses you may have made in other investments.

    3) You don't lose even a day's growth

    You don't lose even a day's growth when you invest in an open-ended debt fund. If you invest in a fixed deposit or a closed-ended fixed maturity plan, you get a lump sum amount at the end of the term. Hectic work schedules and busy lifestyles mean you may take some time to encash the fixed deposit and then reinvest the proceeds. In some cases it could be even a month or two before the money is redeployed. That can be a drag on the overall returns. Besides, there is no telling what the prevailing rate of interest is when the investment matures. In a debt fund, there is no such problem because the investment never stops growing till you redeem it.

    4) Your returns can be higher

    The pre-tax returns from debt funds are comparable with those from other debt options such as fixed deposits and bonds. But if there are changes in interest rates, your debt fund could give higher returns. Short-term debt funds are not affected too much by rate changes. Generally, their returns are aligned with the prevailing fixed deposit returns and the investor gains from the accrual of interest on the bonds in the fund's portfolio. But funds that invest in long-term bonds are more sensitive to changes in interest rates. If interest rates decline, the value of the bonds in their portfolio shoots up, leading to capital gains for the investor. While the average short-term debt fund has given 9.5% returns in the past one year, many long-term bond funds have risen by more than 12% during the same period.

    5) They offer greater flexibility

    Debt funds are also more flexible than fixed deposits. You can invest small amounts every month by way of an SIP or whenever you have surplus cash. Can you imagine opening a fixed deposit every time you have an extra Rs 2,000-3,000 in your bank account? Similarly, you can start an SWP to withdraw a predetermined sum from your investment every month. This is particularly useful for retirees who want a fixed income every month. You can also change the amount of the SWP whenever you want.

    Another key advantage is that you can seamlessly shift the money from a debt fund to an equity fund or any other scheme from the same fund house. If you have a substantial amount to invest, put it in lump in a debt fund and then start a systematic transfer plan to the equity scheme you want to buy. Compared to the 4% your money would have earned in the savings bank account, it has the potential to earn 9-10% in the debt fund. The icing on the cake is that there is no penalty if the STP stops due to insufficient money in your debt fund.
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  • Understanding the ABC of Debt funds


    A debt mutual fund scheme invests in debt papers like Government bonds, fixed deposits, approved private deposits and so on. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. It is important to hold the right mix of Debt - Equity in the portfolio that will help you optimize returns while managing returns.
    As a first step, we need to understand the basic difference between bonds and debt mutual funds because often they are erroneously perceived to be the same.

    * It is less risky to invest into a debt fund than to invest directly into a debt security
    * The investor of a bond or debt security gets the interest or the coupons directly, whereas an investor in a debt fund receives a dividend at the discretion of the fund house
    * There can be times when you may not be able to sell a debt security in the debt market, or you may be able to sell only at a huge loss as there may not be anyone willing to buy. With debt funds, the fund house will always redeem your fund units at the declared NAV
    * Debt funds are managed by professional fund managers whose job is to track and invest in the debt market. As an individual bond investor, one may not have the time and resources to track and invest appropriately
    * Bonds or debt securities have a maturity date but the debt funds do not have a maturity date

    Classification based on underlying instruments -
    The classification incase of debt mutual funds is typically based on the underlying instruments, the most commonly used mutual funds within this category are -
    Liquid Funds / Liquid Plus Funds or Money Market Funds
    'Liquid', here means anything that is almost as good as cash. Money market funds or Liquid funds as they are commonly known, are one of the safest places to park your money for short periods of time. The funds invest into money market securities and debt securities that mature in 91 days.
    Most Corporates park their short term money into these funds. There is a subtle difference between Liquid / Liquid plus funds; as they say the devil is in the details and in this case the tax aspect is the key differentiator. The liquid plus funds attract a 14.1625% while plain liquid funds dividends are taxed at 28.325%.
    Some of the benefits of parking money into liquid funds are -

    * Zero exit loads
    * Investments are very safe
    * Money can be redeemed in a day
    * Lowest expense ratio of all the mutual funds
    * One can invest with a minimum of Rs 5,000
    * Multiple periods of dividend reinvestment options - daily, weekly, fortnightly, monthly

    Floating Rate Funds
    Floating rate funds or Floaters invest into floating rate debt securities. Most of the debt securities in a floater fund will mature within a year. The main benefit of investing into a floater fund is that when the RBI increases the interest rates, the interest rates on floating rate debt securities also increase, thus when interest rates are expected to rise, floaters are better debt investments than other debt funds.
    Floating rate funds invest 65% to 100% of their money into floating rate instruments and the rest in other debt securities.
    Gilt Funds
    They invest their corpus in securities issued by the government. These funds carry zero default risk but are associated with interest rate risk. So, there could be a possibility that the debt funds lose some part of their net asset value (NAV) also. But these schemes are safer as they invest in papers backed by the government.
    Income Funds
    A type of mutual fund which emphasizes on current income, either on a monthly or quarterly basis, as opposed to capital appreciation. Such funds hold a variety of government, municipal and corporate debt obligations, preferred stock, money market instruments, and dividend-paying stocks. These have a tendency of moving in the opposite direction as compared to Interest rates. Hence it would be a good option to avail when the interest rates have peaked and are likely to turnaround.
    Fixed Maturity Plans
    FMP is a closed-ended fund that invests in debt and money market instruments of the same maturity as the stated maturity of the plan. The focus of a fixed maturity plan is to provide a stream of income through interest payments, while exposing the investor to a lower level of risk.
    Monthly Income Plans (MIP)
    They invest most of their corpus in debt instruments and a minimum in equities. They get the benefits of both equity and debt market. These schemes rank slightly high on the risk-return matrix. These try to give you a monthly income in the form of dividends, which is of course not guaranteed. These funds are for investors, who have a big corpus initially, and would like to generate a monthly income for themselves with low to moderate risk.

    And finally, here is a quick reckoner on debt mutual funds -


    Fund TypeInvt. ObjectiveLiquidityRiskReturnsLoadsInvests inLiquid / Liquid Plus FundHigh level of income from short term investmentsVery High - within 24 hrsVery Low4.5% - 8%Entry / Exit - NilCall Money, T Bill etc..Floating Rate FundProvide income consistent with the prudent risk ( LT & ST available)Very High - within 24 hrsVery Low5.5% - 8%For ST - Nil; For LT - Exit Load - 0.25% - 0.5% ( for invt. Upto 3-6 mths)Mibor linked papersIncome FundsGenerate both income & capital appreaciation3 Business daysCredit / Interest Rate Risk6.5% - 10 %Entry / Exit - Nil / 0.25% ( 15 days - 6 mths)G-secs, corpporate, cal money, bank depositsFixed Maturity Plans (FMP)Tax efficient yeild as compared to Bank Deposits - has locking2 Business daysCredit / Interest Rate Risk7.5% - 10%Lockin Bank Deposit, G-secsMonthly Income OptionGenerate regular income & Capital Appreciation3 Business daysModerate Risk 8% - 12%Entry / Exit -0-1% / 0.5% (6 mths)Short duration fixed income paper, equity funds


    Hope this helps you in choosing the right debt mutual fund to complement and balance your portfolio.
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  • Long-term funds: Catch the trend reversal

    Interest rates and bond prices move in opposite directions, so the value of the debt holdings in your mutual fund varies inversely with the movement in interest rates. When interest rates fall, debt funds witness a rise in their NAV and vice versa. Now that interest rates have seemingly tapered off, the bond market is anticipating a reduction in the near future and is, therefore, gradually moving towards longer term bonds. This is because when interest rates fall, the newer bonds issued will offer a lower interest rate than that currently offered by the bonds already trading in the market. This pushes up the demand for these existing bonds, which, in turn, pushes up their prices. This spike in bond values translates into more returns for the funds which hold these securities. If interest rates come down, capital appreciation would be very pronounced on longer duration debt paper, which are more sensitive to fluctuations in rate movements than short-term paper. This would make long-term debt funds a more attractive proposition.

    The best option in this category, if the reversal in monetary stance really happens, is Gilt funds. These schemes invest in government securities (or gilts), which are bonds issued by the RBI. These long-term government bonds have witnessed a softening in yields as the central bank has signalled that further rate hikes may no longer be on the cards.

    However, it would be wrong to assume that such gains are a given. With gilt funds, there is a heightened element of risk in terms of interest rate movement. If, for some reason, interest rates were to rise further from here, or the impending reversal does not come about, government bonds would lose value and investors in gilt funds would witness significant capital erosion. Das cautions, "Inflation might come back after a while which could lead to increased volatility, thus hampering returns from gilt funds".
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  • Recently, the mutual fund industry saw more flows into the debt-oriented funds, especially on the fixed maturity plans (FMPs) and short-term funds. Going ahead, investors' interest is expected to be more in these debt-oriented funds due to continuing uncertainty in both domestic and global economy Given the possibility of reduction in interest rates, fund flows into FMPs and short-term funds will be more in the near-term, he said.
    "When there is a likelihood of reduction in interest rates, fund flows will be more into FMP-kind of schemes. Also, short-term funds (debt oriented) are also likely to attract more funds due to possible capital gain

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  • Good thread initiative Charlie.

    You made an important point above...before one makes a good portfolio of a debt n equity based MFs...one can put money in a good debt fund and make STPs into Balanced or equity funds etc. Point well taken.

    Can you explain this with example of some live MFs, which in your view are good ones to consider. Take an example below:

    If you were to manage a corpus of 60 Lacs on the above lines, for a 50 year old retired person who has medium risk appetite, what would you do. The requirement is monthly income of Rs 50 K/month from Day 1, which goes up by 5 K each year.

    Would be interesting to see what you can come up with. Thanks in advance.
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  • Thanks! Mr. Kapoor

    I will do the needful!

    Best,
    Charlie

    Originally Posted by VedKapoor
    Good thread initiative Charlie.

    You made an important point above...before one makes a good portfolio of a debt n equity based MFs...one can put money in a good debt fund and make STPs into Balanced or equity funds etc. Point well taken.

    Can you explain this with example of some live MFs, which in your view are good ones to consider. Take an example below:

    If you were to manage a corpus of 60 Lacs on the above lines, for a 50 year old retired person who has medium risk appetite, what would you do. The requirement is monthly income of Rs 50 K/month from Day 1, which goes up by 5 K each year.

    Would be interesting to see what you can come up with. Thanks in advance.
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  • FMP: What, Who and Why...


    1. What is an FMP? :bab (61):

    Fixed Maturity Plans or, in short, FMPs (may also be called as FTP, FTIF etc) are debt schemes with a fixed maturity, launched by mutual funds. They run for a fixed period of time that could range from one month to as long as three years or more. The objective of an FMP is to generate a return over a fixed maturity period.

    FMPs invest in fixed income securities like money market instruments government securities, corporate bonds, certificate of deposits (CDs), commercial papers (Cps), bank fixed deposits (FDs) etc., which mature in line with the tenure of the fund. Since the instruments are held to maturity, there is no risk of the value of the security being affected by interest rate movements.

    2. Who should invest in FMPs?


    * FMPs are suitable for Investors who seek safe avenues for investment and in the process keep money in fixed deposits (FDs) with banks. They can earn tax efficient returns # based on current tax laws. :bab (59):
    * Investors who want to park money for a fixed period of time in relatively safe instruments giving returns, with a view to meeting certain financial goals in the near future.
    * Even aggressive investors who normally prefer equity investments should invest a part of their funds in FMPs, as one needs to have a proper asset allocation in place to achieve their goals. FMPs offer stability to the investment portfolio.

    3. Why FMPs are attractive in the present investment environment?


    FMPs are attractive for investors who look for a return and investors who require their funds back after a certain period.

    In the present scenario when interest rates are high provides good opportunity to lock in investment at relatively higher yields. While long term debt funds are susceptible to interest rate movements, FMPs by the very nature of their structure offer a good cushion against interest rate movement.
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  • Dynamic bond funds: Ride with the fund manager

    Dynamic bond funds have the flexibility to shift the scheme maturity period according to the interest rate scenario. These were the first to take advantage of the softening bond yields by gradually increasing their portfolio maturities over the past few months. This enabled many of them to outperform other income funds.

    The fund managers of bond funds also have the flexibility to move into cash and wait when there is unusual movement in interest rates.

    "The dynamic bond fund is an evergreen product where the investor can benefit from both worlds in terms of softening and hardening of yields".

    Traditional income funds do not enjoy such freedom, and when you invest in them, you are basically taking a call on the future interest rate movement. However, a dynamic bond fund could be an ideal alternative for retail debt investors who are not comfortable with taking a view on interest rates.

    "Dynamic bond funds are well positioned to stay abreast of the interest rate cycle. These have the flexibility to shift allocations and also to change the mix of underlying debt instruments."

    However, go ahead with such a fund only after checking its track record and if you have complete faith in the fund manager. There have been numerous occasions when fund managers have taken wrong calls on interest rate movements and ended up hurting investors.
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  • STP Vs Lumpsum: What Works Best

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  • DSP Blackrock's Dhawal : currency is a key determinant in market sentiment

    Besides other macros at the domestic level, the rupee movement has been a key factor in determining the market sentiment. Dhawal , executive vice-president and head (fixed income), DSP BlackRock Investment Managers, tells Puneet Wadhwa the rupee may remain volatile in the current environment, and it would a prudent strategy to invest in the fixed income products

    Exchange rate factors in high current account deficit: Dhawal
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  • All above is meaningful only when you have faith in long term aspects of share market and it performs accordingly.

    I even find SIP investment too boring these days . . . .(Are we interested to just saving our money or want to see in growing) Economical changes are difficult to predict and we all have our own sets of assumptions.

    * I am a regular investor in share and SIP :-)
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  • All the stuff provided above is related to debt market not stock market...

    And Debt market giving decent returns + those who land in a highest tax bracket can make 2-4% extra returns as compare to FD with very less risk by investing in Debt Funds...

    Originally Posted by dpkmjn2012
    All above is meaningful only when you have faith in long term aspects of share market and it performs accordingly.

    I even find SIP investment too boring these days . . . .(Are we interested to just saving our money or want to see in growing) Economical changes are difficult to predict and we all have our own sets of assumptions.

    * I am a regular investor in share and SIP :-)
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  • FMPs: Lock in to high yields

    Currently, most individuals will be gunning for bank FDs offering around 10% rate of interest believing that such high rates may not be offered in the future. But what if you could get the same high returns as well as tax benefits?

    Investors can enjoy this double bonanza with the aid of fixed maturity plans. Like FDs, these have a fixed tenure and are pure fixed income products.

    However, where the two differ is that unlike bank FDs, FMPs do not guarantee a fixed rate of return, but they offer better post-tax returns. As an FMP is a close-ended instrument, the fund house has a reasonable idea about the rate that it will earn on its investments, thus providing 'indicative returns' to investors.

    https://api.indianrealestateforum.com/api//v0/attachments/fetch-attachment?node_id=12424


    FMPs steal a march over the ubiquitous bank FDs when it comes to post-tax returns. The interest earned on bank FDs is taxable according to the income tax bracket the individual belongs to. So, an investor in the highest tax bracket holding a 10% FD will effectively earn a post-tax yield of only 6.91%.

    This is not the case with FMPs. This is because FMPs with maturity of more than a year are eligible for inflation indexation benefits, where the returns are taxed at 10% without indexation or 20% after indexation, whichever is beneficial for the investor.

    Depending on the tenure of the FMP (from 180 days to three years), the fund manager invests in a combination of instruments of similar maturity. As we are near the peak of the rate cycle now, it would make sense to lock in the high rates with the help of long duration FMPs. Das believes FMPs are best suited for conservative investors who want to be sure about what kind of returns they would get and don't want to take a chance with interest rate movements.
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  • could you please quote few debt mututal fundz for further clairty ?
    Please quote a simple example about these debt fundz and How they are bettet than FDs ?
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  • https://api.indianrealestateforum.com/api//v0/attachments/fetch-attachment?node_id=12480

    Originally Posted by dpkmjn2012
    could you please quote few debt mututal fundz for further clairty ?
    Please quote a simple example about these debt fundz and how they are bettet than fds ?
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