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Risk averse investors could look at investing in debt fund
Published On , 31 May 2016 By Times Of India
Most Indians, when it comes to investing, are risk averse. This is one of the main reasons why Indians prefer to keep a large sum of money in bank fixed deposits (FDs), even though there are alternative investment products which can give higher returns on a posttax basis when kept for more than three years, better liquidity but come with just a bit of higher risks. One of such alternative investments is fixed income funds, also called Debt funds, by mutual fund houses.
WHAT ARE Debt FUNDS? Debt funds are those mutual fund schemes that invest most of their money in fixed income instruments like treasury bills, government and corporate bonds, certificates of deposit, commercial papers etc. These instruments pay a fixed rate of return either at regular intervals or at the end of their term. While instruments issued by the government are almost risk free, there are various levels of risk, from very low to very high, in case of fixed income instruments issued by corporates.
Since Debt funds invest in fixed income instruments which show lesser amount of volatility compared to equities over the long period of time, the returns from these funds are also relatively more predictable than Equity funds. (See graphics below)
TYPES OF Debt FUNDS
There are various types of Debt schemes. The most popular ones are, according to the duration of instruments they predominantly invest in, are categorised as Liquid Funds, ultra short-term funds, short term bond funds, medium term bond funds and long term bond funds.
Liquid Funds are those schemes in which investors can keep money which they would probably need within a month or two from investing. Usually there are no exit loads for investing in these schemes.
Ultra-short term funds: Investors who are looking to invest their surplus money for between two months and one year, and wants some better returns from bank FDs of similar durations, can look at these funds.
Short-term bond funds: Investors who have some surplus money to invest for between a year and three years should consider investing in these funds. If you can keep the money even for a day more than three years, you can enjoy even better post-tax return because in that case you can enjoy indexation benefits which will help you realise even higher post-tax return.
Medium-term bond funds: Investors who are looking to invest money for between three and five years should consider these funds. Returns from these funds qualify for indexation benefits, hence your posttax returns will get an automatic boost.
Long-term bond funds: If you are looking to invest money for more than seven years and your are scared to take risks associated with stocks, then you should consider these funds. Here also you can boost your post-tax returns by taking advantage of indexation benefits.
POINTS TO REMEMBER
Like in every investment, while investing in Debt funds one should remember a few points.
Mind the exit loads: If you redeem your investments during the exit load period, your total returns will be reduced by that much.
Duration risk: If you are investing in these funds for more than a year or so, in case the rate of interest in the economy rises, a part of your return may be negated by fall in market price of the Debt instruments.
Credit risk: A part of your returns may also suffer due to rating downgrade(s) of some of the bonds/papers in the portfolio of the scheme you have invested.
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