Article

4 Debt Fund

05 Jul 2018 Jitender Singh

Debt funds invest in fixed income securities like Government bond, Corporate bond and money market securities with different maturities. Debt funds are categorized as Gilt Funds, Income funds, Liquid funds and MIP etc.

Debt funds are appropriate for investors who are risk aversive and are seeking regular income. Some of the advantages are discussed below:

  1. Less volatile than equity market: The returns of debt funds are less volatile than equity funds since debt mutual funds invest in debt securities, where interest income is regular and prices are relatively stable than equity investments.

  2. More liquid than fixed deposit: Investors can invest and withdrawal, fully or partially, at any time, unlike fixed deposits.

  3. More investment flexibility than fixed deposits: Investors can choose to switch to other schemes in the same fund house, like from a debt fund to an equity fund,

  4. Taxation Benefits: Debt fund are more tax efficient than other fixed income instruments. After 3 year of investment, investors have to pay 20% tax after indexation on long-term capital gains. Indexation is adjusting investments for inflation for holding period.

Below are the top 4 debt funds which investors can add in their portfolios.

Scheme Name

AUM

(Rs Cr)

1 Y (%)

3 Y (%)

5 Y (%)

Income Fund

Franklin India ST Income Plan(G)

9,971

7.5

8.3

8.9

ICICI Pru Corporate Bond Fund(G)

7,866

5.6

7.8

8.0

Reliance Corporate Bond Fund(G)

8,132

5.3

8.3

--

UTI Credit Risk Fund-Reg(G)

4,538

5.9

8.2

8.4

1 year returns are absolute; 3 years and 5 year returns are CAGR.
AUM as of April 2018, Returns are as on May 11, 2018

1) Franklin India ST Income Plan

  • The fund primarily invests in short term corporate bonds with a focus on higher interest income.
  • Investors can invest the fund for an investment horizon of 1 year or more.
  • As of April 2018, the fund had invested ~50% in A and equivalent debt securities and ~37% in AA and equivalent debt securities.

2) ICICI Prudential Corporate Bond Fund

  • It is a medium term fund which predominantly invests in AAA/AA rated corporate bonds.
  • The fund is well poised to earn good accrual from good quality papers and also benefit from fall in interest rates.
  • The fund avoids investing in papers rated below AA- thereby maintaining the overall quality.
  • As of April 2018, the fund has invested ~76% in AA and equivalent debt securities and ~19% in AAA and equivalent debt securities.

3) Reliance Corporate Bond Fund

  • It is a medium term fund which predominantly invests in AAA/AA rated corporate bonds thereby maintaining the overall quality.
  • The fund is well poised to earn good accrual from good quality papers and also benefit from fall in interest rates.
  • As of April 2018, the fund has invested ~76% in AA and equivalent debt securities and ~17% in AAA and equivalent debt securities.

4) UTI Income Opportunities Fund

  • It invests in high income accruing securities with short term maturity to generate reasonable income and capital appreciation.
  • The fund aims to capitalize on mispriced credit across the credit spectrum.
  • As of April 2018, the fund has invested ~56% in AA and equivalent debt securities, ~16% in AAA and equivalent debt securities, and ~9% in A and equivalent debt securities.
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4 Debt Fund

05 Jul 2018 Jitender Singh

Debt funds invest in fixed income securities like Government bond, Corporate bond and money market securities with different maturities. Debt funds are categorized as Gilt Funds, Income funds, Liquid funds and MIP etc.

Debt funds are appropriate for investors who are risk aversive and are seeking regular income. Some of the advantages are discussed below:

  1. Less volatile than equity market: The returns of debt funds are less volatile than equity funds since debt mutual funds invest in debt securities, where interest income is regular and prices are relatively stable than equity investments.

  2. More liquid than fixed deposit: Investors can invest and withdrawal, fully or partially, at any time, unlike fixed deposits.

  3. More investment flexibility than fixed deposits: Investors can choose to switch to other schemes in the same fund house, like from a debt fund to an equity fund,

  4. Taxation Benefits: Debt fund are more tax efficient than other fixed income instruments. After 3 year of investment, investors have to pay 20% tax after indexation on long-term capital gains. Indexation is adjusting investments for inflation for holding period.

Below are the top 4 debt funds which investors can add in their portfolios.

Scheme Name

AUM

(Rs Cr)

1 Y (%)

3 Y (%)

5 Y (%)

Income Fund

Franklin India ST Income Plan(G)

9,971

7.5

8.3

8.9

ICICI Pru Corporate Bond Fund(G)

7,866

5.6

7.8

8.0

Reliance Corporate Bond Fund(G)

8,132

5.3

8.3

--

UTI Credit Risk Fund-Reg(G)

4,538

5.9

8.2

8.4

1 year returns are absolute; 3 years and 5 year returns are CAGR.
AUM as of April 2018, Returns are as on May 11, 2018

1) Franklin India ST Income Plan

  • The fund primarily invests in short term corporate bonds with a focus on higher interest income.
  • Investors can invest the fund for an investment horizon of 1 year or more.
  • As of April 2018, the fund had invested ~50% in A and equivalent debt securities and ~37% in AA and equivalent debt securities.

2) ICICI Prudential Corporate Bond Fund

  • It is a medium term fund which predominantly invests in AAA/AA rated corporate bonds.
  • The fund is well poised to earn good accrual from good quality papers and also benefit from fall in interest rates.
  • The fund avoids investing in papers rated below AA- thereby maintaining the overall quality.
  • As of April 2018, the fund has invested ~76% in AA and equivalent debt securities and ~19% in AAA and equivalent debt securities.

3) Reliance Corporate Bond Fund

  • It is a medium term fund which predominantly invests in AAA/AA rated corporate bonds thereby maintaining the overall quality.
  • The fund is well poised to earn good accrual from good quality papers and also benefit from fall in interest rates.
  • As of April 2018, the fund has invested ~76% in AA and equivalent debt securities and ~17% in AAA and equivalent debt securities.

4) UTI Income Opportunities Fund

  • It invests in high income accruing securities with short term maturity to generate reasonable income and capital appreciation.
  • The fund aims to capitalize on mispriced credit across the credit spectrum.
  • As of April 2018, the fund has invested ~56% in AA and equivalent debt securities, ~16% in AAA and equivalent debt securities, and ~9% in A and equivalent debt securities.
Research Disclaimer