BASICS of DEBT FUNDS.

#1
Debt Funds and Insurance companies are always using uncommon words hard to understand for common people.

For example : Debt Fund Plans – Liquid money market fund, Ultra short term income fund, Short term and long term income fund, short term and long term gilt fund, Multiple yield, fixed maturity plan, monthly income plan, dynamic bond fund!!! etc.

Debt fund invest in debt securities they also have uncommon names like GILT, G-SEC, T-BILLS, CD, CP, BONDS and DEBENTURES!!!

If we want to see Debt Securities Ratings symbol that’s also not possible because Crisil, Icra, Care, Fitch all have different symbols for different debt securities.

So for common investor it is hard to study and invest in Debt funds so he goes to bank and invest in fixed deposits.

But when fixed deposit interest rates come down old debt securities price go up and profit after tax could be more. Also debt fund profit is under capital gain tax so we can also use it for Cost Inflation Indexation and Loss set off to save tax.

Debt funds usually invest in debt securities of Central Government, Banks, Financial Institutions, Govt. Companies as well Private companies.

Debt Securities by Central Government for Long Term 5 years to 30 years is called G-SEC or GILT. Though these are 100% secure but interest rate fluctuation has large impact on it.

When Central government issue Debt securities for short term like 91/182/364 days they called T-BILLS.

It is compulsory for banks to invest in these T-BILLS to maintain their Statutory Liquidity Ratio (SLR)... (Hopefully you heard this word on RBI Policy review) so they have good liquidity but Return is not that good.

When bank issue 91 days to 1 year Debt securities called Certificate of Deposit (CD)

Financial institutions issue 1 year to 3 year CD.

Private companies below 1 year Debt securities called Commercial Paper (CP)

CP is less liquid than CD.

CD issue by banks so they are more secure.

Govt. or Govt. Companies issue Debt securities for more than 1 year is called BOND.

And if Private Companies issue these it is called DEBENTURES.

Checking of Credit ratings of private companies are important because if rating is good Debt securities interest is less and if rating is low level Debt securities interest is high. Because low level Debt securities risk of interest and capital is high.

All above Debt securities having yearly yield generally in between 7% to 10%.



Thank You

Nimish Shah

"Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway." - Warren Buffett

 
#2
thanks alot.
India do not have a much clarity on the debt investment oppourtnities. is there a way ( conslidated way) to know where i can invest in CPs/ CDs

as in where i can see the available debt instruments available for the indian investors ....???
 

Similar threads

Trade in Rs 20, No more % brokerage

Name:Phone:
Email:City:
State:
Are you a day trader?