Article

4 Debt Fund

Jitender Singh

15 May 2018

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 

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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 

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4 Debt Fund

Jitender Singh

15 May 2018

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