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Among fixed income investments, debt mutual funds score high
Published On , 12 Jan 2016 By Times Of India
In the last one year, except for a select few sectoral funds and small cap funds, not many of the Equity funds have given great returns. On the other hand, Debt funds have done relatively well in terms of returns. So far in the new year too, the stock market has been extremely volatile, pushing investors to look for safer havens. In this context, Debt funds are looking safer bets for those investors who do not have the appetite for higher level of volatility.
Investors who look for a regular income stream, also look at fixed income products like Debt funds, bank fixed deposits and post office monthly income schemes. “Among the fixed income products, Debt funds score over others because of chances of higher return, has nearly similar level of risks and liquidity,” said Jignesh V Shah, president, South Gujarat IFA Association. According to Shah, people looking for regular income could opt for a systematic withdrawal plan (SWP) in Debt funds, which, if done judiciously could also save on taxes.
Shah explained how it works. For example a person invests Rs 1 lakh in a Debt plan from which he/she wants a regular stream of income. The person invests at Rs 10 NAV, so he gets 20,000 units of the scheme. Now this person wants Rs 2,000 every quarter. So at the end of the first quarter since investing, say the NAV of the fund goes up to Rs 10.05. At this NAV, if the person withdraws 199 units, he/she will get nearly Rs 2,000. Now if this is done every quarter, the person can get a regular income.
Now if the person invests Rs 1 lakh and goes for a similar SWP three years after investing, the burden of paying tax on the gains that had accrued to him/her will be minimal. This is because the person will enjoy the benefits of long term capital gains and will have to pay a tax of just 10% if he/she doesn’t want to avail of indexation, Shah said. In case the person wants to take benefit of indexation, then he/she will pay 20% tax after indexation benefits are availed of.
Shah also suggested two specific types of Debt funds for fixed income investors, but warned that these schemes carry slightly higher amount of risks. These are duration funds and credit opportunities funds.
Duration funds are those in which the fund managers take a call on the rate of interest in the market, and hence yield on bonds in his portfolio, and try to maximum return. Since the yield on a bond is inversely proportional to the price, the fund manager takes a call on yield and tries to maximise returns.
On the other hand, in credit opportunities fund, the fund manager would look for companies in which there is a chance for a credit rating upgrade, which will lead higher price of bonds issued by that company and hence to a fall in yield for the same bond. If the fund manager can buy such bonds cheap and sell after credit rating goes up, he/she can give higher returns to investors in the fund.
“Investors who want to invest in duration and credit opportunities funds should look at the experience and expertise of the fund management team and also their processes,” Shah said. “IFAs can play a very important role in fund selection for investors,” he said.
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