Debt Funds

[Vicky78]

The risk in debt funds are interest rate risk. Debt instruments tend to match their yield with the current interest rate scenario. So when the interest rate goes up the bond value goes down such that the yeild matches the current interest rate. This however are applicable to bonds that mature at a very later stage. As the bond nears the maturity period it is less sensitive to interest rate changes.

Valueresearchonline.com provides the details of every fund and how sensitive they are to interest rate. Short term funds are least sensitive whereas GOI bond funds are the most sensitive.

[mrindia]

Hello!
I know very little about debt funds. Correct if I go wrong.

Any fund investing >65% in debt instruments is considered as debt-fund.
If units are redeemed <1yr of purchase, profit will be added to your gross income like from any other source & will be taxed according to your tax-bracket.
If kept for >1yr, tax will be 10% or 20% depending on indexation applied or not.

By the way, I want to know peer views about parking some money in 'Birla Gilt Plus Reg' for debt portion of my portfolio. Horizon is around 6-8months.
Are there 'Growth' & 'Dividend' options in debt funds also?

Thanks in advance

mr india

[milind]

I looked up value research for Birla Gilt Plus Reg.

+ Return for 1y was >14%, and is a 5* fund
+ No exit load irrespective of holding period
- Risk is above average
- It has assets less than 100Cr. Why? Birla itself has other debt funds with lot more assets

Among two top holdings, it has GOI 2036 8.33%, and GOI 2027 8.27%. Direction of interest rates is expected to be downward now. How will this fund react to falling rates? Any comments?

-- Milind

[mrindia]

Hello!
I also want comparative views b/w Gilt vs FMP category?
Anybody plz help!
mr india

[Vicky78]

Originally Posted by milind

I looked up value research for Birla Gilt Plus Reg.

+ Return for 1y was >14%, and is a 5* fund
+ No exit load irrespective of holding period
- Risk is above average
- It has assets less than 100Cr. Why? Birla itself has other debt funds with lot more assets

Among two top holdings, it has GOI 2036 8.33%, and GOI 2027 8.27%. Direction of interest rates is expected to be downward now. How will this fund react to falling rates? Any comments?

-- Milind

In all interest rate sensitive debt funds, when the interest rate set by the RBI moves downward the return of the fund moves upward.

Let me explain this with an example with the top bonds held by Birla Guilt Plus Regular- GOI 2036 8.33% and GOI 2027 8.27% . The naming convetion means that it is a GOI (central Government Of India) bond maturing at 2036 and 2027 respectively with an interest rate of 8.33% and 8.27%.

Lets assume the face value is Rs 100.

These interest rate of 8.33 and 8.27 would have been set at the inception of the bond. During that time the prevailing interest rate in the country should have been about 8.25%.

Now consider a scenario when the interest rate goes up to 9.00%. The fresh bonds issues by GOI would be coming out with rate of 9.00%. So the value of bonds at 8.33% and 8.27% will go down from their face value. The value of the bond will go down to such an extant that bond yield (rate) is now 9% till maturity.

Calculating we get

Face value of Rs 100 drops to Rs 94.13 for GOI 2027 8.27% &
Face value of Rs 100 drops to Rs 88.95 for GOI 2036 8.33%

Note that later the maturity the more the bond value will drop.

The exact reverse is also applicable. Say if the RBI rates go down to 7.5%. The bond yeild will match the current interest rate and the value will go up.

Hence there is a lil room for speculation on wether rates will go up or come down but speculation is not as bad as equities. Birla guilt plus regular has been a good fund. They have handled the interest rate risk well.

Recently bond yields were shooting up on speculation of rate cut by RBI. So this fund posted very high returns in one year. Its not something you could expect from a gilt fund consistanly. A rate of 6-7% by an average gilt fund is more realistic.

[Vicky78]

Originally Posted by mrindia

Hello!
I also want comparative views b/w Gilt vs FMP category?
Anybody plz help!
mr india

I have not invested in FMP either. If anybody knows more about it please do share...

[swama694]

my preference is

MIPs

ICICI prudential income multiplier cumulative
HDFC MIP LT

Income schmes
Birla Income plus
Birla sunlife Income

For both invest for 1 year to get tax adv.

[Vicky78]

Originally Posted by swama694

my preference is

MIPs

ICICI prudential income multiplier cumulative
HDFC MIP LT

Income schmes
Birla Income plus
Birla sunlife Income

For both invest for 1 year to get tax adv.

Yeah... I like MIPs too. MIP and a short term fund.

but for any fund that maintain less than 65% equities, long term capital gains taxes of 10% are applicable.

[mrindia]

Hello!
I fear the cut-off is 65% for the same.

mr india

[Vicky78]

cool thanks for the correction!