Understanding debt mutual funds
Indians’ penchant for debt investment is quite well known. About 59%* of financial savings is parked in bank fixed deposits (FDs). But take a look at the investment universe. It is huge and flooded with other debt instruments which can be used to generate returns. In this article, let’s take a look at debt mutual funds. *Data for FY14; source: RBI
What are debt mutual funds?
Debt mutual funds are professionally managed mutual fund schemes that enable investors to take
exposure to fixed income instruments. The underlying portfolio of a debt mutual fund scheme
comprises securities of varying instruments (certificates of deposit or CDs, government security or G-secs, commercial papers or CPs, bonds, Treasury bills, etc.) as per asset allocation and investment objectives.
By investing in mutual funds, investors benefit from the following:
fund manager is backed by a dedicated research team and is able to make tactical calls based on market movement and prospects – something a retail investor may not be in a position to do so.
2)Diversification: You can enjoy the benefit of diversification if you have not invested in debt portfolio. The resulting diversification reduces risk and enables the fund manager to take advantage of differing market environments.
3)Plethora of offerings: Debt mutual funds have a scheme for each different risk profile. Through debt funds, investors can gain exposure to G-secs, CDs and CPs through short-term liquid fund schemes, as well as debentures issued by corporate houses.
4)Economically efficient: Mutual funds do not require investors to shell out large amounts of money to invest. . You may invest
5)Indexation benefit: An investment for over 36 months qualifies for long-term capital gains tax at 20% with indexation. Tax advantage helps investors use inflation to reduce the tax liability.
As already mentioned, the choice is immense (Table 1), which allows investors to invest as per their risk-return profile and life stage. Note that the choice of schemes is illustrative.
For instance a young investor at the start of the career has a higher risk appetite and time horizon and, thus, he can look at investing in long-term debt categories such as monthly income plans, gilt funds, long-term income funds and credit opportunity funds.
As the investor’s age advances, the risk-taking capacity
may diminish. Hence, investment in shorter maturity schemes such as fixed maturity plans, liquid funds and ultra-short term debt funds may be considered. The shorter lock-in period ensures that funds can be accessed to meet both expected and unscheduled financial obligations.
As can be seen from Chart 1, a small portion of equity in the portfolio can enable investors to generate inflation adjusted returns in the medium to long term. CRISIL-AMFI Monthly Income Plan Index which invests up to 30% of the portfolio in equity has been used for the inference.
Table – 1 – Types of debt mutual funds
Table – 1 – Types of debt mutual funds
Fixed income securities can be ideal for those who have moderate risk tolerance and want relatively stable returns. Do consider your risk tolerance, liquidity requirements and long-term financial objectives before investing.
Any information contained in this article is only for informational purpose and does not constitute advice or offer to sell/purchase units of the schemes of SBI Mutual Fund. Information and content herein has been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. Investors should consult their financial advisers before taking any investment decision.
Mutual Fund investments are subject to market risks, read all scheme related document carefully.