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Debt Funds - Options and Precautions

Debt Funds in India are getting popularity due to its High post tax
return, liquidity, transparency and simplicity. But these are not
without risk they contain Interest rate, Liquidity and credit Risk too.
Lets understand Type of Debt funds schemes available and Risk and
reward associate along with suitability to Investors.
Liquid/Ultra Shorts / Floating Rate Funds
These fund primary invest in short term treasury (less than 90 days)
and best suitable for short term parking. These Funds are least risky
among debt funds option available. Corporate, HNIs use these
schemes for their working capital surplus and enjoy higher yield
than banks.
Fixed Maturity Plans - FMPs
They come with different maturity between 3 months to 3 year and
invest in treasury and bonds and enjoy fixed coupon. Returns are
more predictable as fund invest in CDs and CPs with fix rate. Best
suitable for those who want fixed yield and can compromise on
liquidity as there is no exit before maturity.
Bond Fund/Income Funds
Investment baskets of these funds are CDs, CPs, Corporate bond
and Govt security. We can differentiate these schemes among
category by the maturity period and type of paper they bought. For
example a short term bond scheme normally invests with maturity
of 2 year or less and a medium term bond fund prefers to invest in
maturity more than 2 year to 5 year.
Also a bond fund invests in corporate bond with or without Govt
security.
Now understand how these differences in maturity and type of
investment in bond fund play role in once portfolio. As we know that
bond instruments are directly related to interest rate scenario.
Hence we can categorize three scenarios as under.
Rising interest rate scenario- lower duration portfolio with lower G
sec maturity can best suitable in these time. Also corporate bond
schemes with fixed tenure can give higher return.
Falling Interest rate scenario- Higher duration portfolio with high G
sec maturity portfolio can give higher return.

Not so predictable time There are time period when it is become


difficult to predict interest rate cycle in these scenario it is best to
invest in those scheme which match your time horizon to avoid
variation arising due to Interest rate risk. FMPs, Ultra term bonds,
corporate bonds can be best suitable in these time.
It is not advisable to invest in debt schemes looking at the past
performance only as interest rate cycle is the most defining aspect which
is volatile.
In below table we have given two 6 month performance dated 30.06.2013
(Falling interest rate period) and 31.12.2013 (Rising interest rate period).
Now it is interested to see that that Green and red colors. Green represent
above average return among schemes and red are below average
schemes. In first half of 2013 schemes which invest in High Govt securities
and with higher maturity are benefiting of falling interest rate scenario
and in second half they are giving below average ( even ve ) return to
those which invest in corporate bond (lower maturity) only.

SCHEMES

Portfolio

Absolute Return %
6
Month 6
Month
return as on return as on
30.06.2013
31.12.2013
Falling
Interest
Rate by RBI

BIRLA SL - INCOME PLUS REG (G)

G sec + Corp
Bond
8.13
G sec + Corp
Bond
6.70

ICICI PRU - INCOME PLAN REG (G)


ICICI PRU - REGULAR SAVINGS FUND
REG (G)
Corp Bond
G sec + Corp
IDFC - DBF REGULAR PLAN REG (G)
Bond
RELIANCE - DYNAMIC BOND FUND G sec + Corp
(G)
Bond
RELIANCE - REG SAVINGS DEBT
PLAN (G)
Corp Bond
G sec + Corp
SBI - DYNAMIC BOND FUND REG (G)
Bond
TEMPLETON - INDIA CORPORATE
BOND OPPO
Corp Bond
TEMPLETON - INDIA INCOME OPPT
FUND (G)
Corp Bond
G sec + Corp
UTI - BOND FUND (G) REG
Bond

Rising
Interest
Rate by RBI

-4.73
-5.27

4.75

2.81

7.38

-2.12

7.10

-1.88

5.02

3.02

7.53

-3.20

5.46

3.21

5.56

3.12

7.50

-2.96

What should investor do?


One should invest in debt scheme keeping in mind the period of
investment and cycle of interest rate prevailing. If interest rate cycle not
predicable than invest slickly in those schemes which has tenure matching
your time horizon. It helps avoiding interest rate risk and Liquidity
risk in portfolio.
Also past performance should not be the barometer while selecting
scheme.
Current scenario (Feb 2014) RBI Rajan and Fin Min Chidambaram are
contradict in their statements so far. Rajan gives more importance to
Inflation hence rising interest rate and Chidambaram want lower interest
rate to have growth in economy. Rajan is prevailing and we have got 3
time rise in interest since he join. Now Fundamentals Higher consumer
price index above 8% is still a reality though with lower growth. A
balancing act will be prevail in coming Monetary policy as can be conclude
from the last meeting and his latest view on Inflation and growth address
in FIMMDA conference held on 26.02.2014. Given the scenario we advise
invest in those corporate bond scheme which match your time horizon to
avoid interest rate risk arising out of rise in interest rate if inflation will
not controlled. Though those investor who can invest for long (more than
2 year) and can avoid looking mark to market loss can invest in Dynamic
bond funds. Less risk appetite investor can consider FMPs, Arbitrage and
Ultra short term Schemes.
Some of the recommended schemes are given below which can be suitable
in these time are:
Returns on Absolute for Period < 1 Yr and CAGR for Period > 1Yr basis
, As on 25-02-2014
Exit
3
6
1
2
3
Loa
SCHEMES
30
M
M
Yr
Yr
Yr
d
D
(M)
0.
2.
6. 10. 10. 10.
BIRLA SL - MEDIUM TERM PLAN REG (G) 62 47 22
37
68
36
24
BIRLA SL - ST OPPORTUNITIES FUND
0.
2.
5. 9.9 10. 10.
REG (G)
52 22 76
7
54
23
12
TEMPLETON - INDIA ST INCOME PLAN
0.
2.
5. 8.9 9.4 9.4
RET (G)
47 20 95
2
5
9
12
TEMPLETON - INDIA INCOME OPPT
0.
2.
5. 8.5 9.3 9.4
FUND (G)
42 20 94
3
4
7
18
TEMPLETON - INDIA CORPORATE BOND
0.
2.
6. 8.4 9.5
OPPO (G)
39 28 35
1
3 NA
30
RELIANCE - REG SAVINGS DEBT PLAN
0.
2.
5. 7.8 8.6 8.8
(G)
43 11 12
7
3
7
12
0.
2.
5. 7.5
UTI - INCOME OPPORTUNITIES FUND (G) 35 33 48
4 NA
NA
18
ICICI PRU - REGULAR SAVINGS FUND
0.
2.
5. 7.4 8.3 8.7
REG (G)
42 35 86
3
1
5
15
SCHEMES- Ultra Short Fund
30

3
M

6
M

1
Yr

2
Yr

3
Yr

Exit
Loa

D
0.
RELIANCE - MONEY MANAGER FUND (G) 69
0.
ICICI PRU - SAVINGS FUND REG (G)
67
0.
BIRLA SL - CASH MGR REG (G)
64
RELIANCE - LIQUID FUND CASH PLAN
0.
(G)
64
HDFC - CASH MGMT TREASURY
0.
ADVANTAGE PLAN RET (G)
62
Past performance may or may not come
in future
Schemes are not sorted in preference
basis, but on past performance basis
only

d
2.
18
2.
18
2.
15
2.
01
2.
07

5.
23
5.
05
5.
14
4.
47
5.
00

9.4
2
9.2
0
8.8
1
8.5
2
8.2
8

9.5
0
9.3
4
8.8
8
8.7
7
8.4
9

9.4
5
9.3
3
8.8
6
8.9
0
8.5
6

We will be happy to address portfolio/report related query.


Best Regards and happy investing
Inderjeet Khanna
(M) 9312836769
info@kbcfinancialservices.com
http://inderjeetkhanna.blogspot.in/

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