Author: Sanjeev Govila

02 Feb 2014
Types of Debt Mutual

Types of Debt Mutual Funds

Continuing with our information regarding Debt Mutual Funds, in this edition, we give out the various types of debt funds and how are they suitable for you.


So, which mutual fund schemes invest in debt? Well, the following schemes are pure debt schemes (that is, they invest only in debt securities):-

Money Market Funds: These funds invest in very short term debt securities and are suitable for parking your money which you have kept aside for your emergency needs.

Flexible Income Funds: Also known as floating rate funds, these invest in debt securities that do not have a fixed coupon rate (that is, interest rate payable on the face value of the security). The rate varies periodically with the movement of a specified benchmark interest rate. If you prefer lesser interest rate risk and are satisfied with the current interest rates prevailing in the market, these funds are suitable for you.

Income Funds: These funds invest in a wide variety of debt securities like bonds, debentures, etc. issued by government, public sector and private companies. They are more diversified and tend to invest in various debt securities depending on the prevailing market conditions. If you plan to stay invested for a longer period (say, more than 3 years), these funds are suitable for you.

Gilt Funds: These funds invest in government securities such as treasury bills, government bonds, etc. If you prefer not to take any credit risk, these funds are suitable for you.

Bond Funds: These funds invest only in fixed income securities. There are many types of bond funds depending on the duration of the debt securities, the credit quality and interest rate. You may pick one to suit your need.

Liquid Funds: These funds invest in debt securities with duration of up to 90 days. These are suitable for very short term investments of a few days or weeks. Instead of keeping your money in your savings account, you can invest in these funds.

Short term Debt Funds: These funds invest in bonds with relatively shorter duration (the duration of debt securities invested by these funds is longer than those invested by liquid funds and money market funds, but shorter than that of income funds). If you plan to stay invested for a few months, these funds are suitable for you.

Fixed Maturity Plans (FMPs): These close-ended funds invest in debt securities with a fixed duration. The duration of the debt securities invested is in line with the duration of the fund. For instance, if the FMP is for 1 year, it can invest in debt securities of one-year duration.

Dynamic Bond Funds: These funds judge the expected change in interest rates and accordingly invest in debt securities. For instance, if they expect interest rates to fall, they invest in debt securities of longer investment duration, and vice versa. If you do not want to predict interest rate movements, this fund is suitable for you.

The following schemes are debt oriented hybrid schemes (that is, they invest a major part of their funds in debt):

Multiple Yield Funds: These funds are debt funds but with a dash of equities, typically in the range of 10 to 30%. These are for you if you are a conservative investor preferring returns along with potential capital appreciation.

Capital Protection Oriented Funds: These funds are basically debt funds with a small amount invested in equity. The portfolio structure of such schemes is that the capital amount is oriented towards protection of capital. The equity investment portion aims to provide capital appreciation. If you don’t like taking risks, this fund is suitable for you.

Monthly Income Plans: These funds invest about 75 to 95 percent in debt securities and the balance in equity. Though they attempt to offer regular income, there is no guarantee of any monthly income. If you prefer a combination of regular income and growth, these funds are suitable for you.

(Source: ICICI Prudential write-up on


Col (retd) Sanjeev Govila

CEO, Hum Fauji Initiatives

Visit our Blog, or facebook page or follow us on Twitter!/humfauji  to get latest insight on matters financial

01 Feb 2014
Investing in Debt through Mutual Funds -

Investing in Debt through Mutual Funds

What does debt investing mean? I understand ‘debt’ to be money borrowed. But I want to invest!

When you lend your money to a bank (by putting your money into your savings bank account or making a bank deposit) or to a company (by investing in a company deposit) or to the government (by investing in bonds offered by state institutions such as IRDA – Insurance Regulatory And Development Authority & SIDBI – Small Industries Development Bank of India, etc. or making your Public Provident Fund (PPF) deposits or by investing in post office schemes), you are making ‘debt’ investments. While for you it actually means saving or investing money, for the borrowing entity (the bank, the company, the government, etc.), it means borrowing money.

Debt investing – through Mutual Funds! But I thought Mutual Funds only invest in equity?

Mutual funds are actually money managers. They offer different schemes to investors:-

*       Equity Schemes mainly invest in equity shares of companies;

*       Gold Schemes invest in physical gold or in shares of companies whose business is gold mining or gold processing

*       Debt Schemes invest in debt securities such as treasury bills, government securities, corporate bonds, money market instruments and other debt securities, which are not linked to stocks or shares.

Does that mean that Mutual Funds invest in the same debt investments that I can directly invest in? If that is so, then why should I invest through mutual funds? I can invest directly!

There are 3 reasons why it makes sense to invest in debt through Mutual Funds:

  • Mutual funds give you access to certain debt securities such as government securities (money market, treasury bills, etc.) which you would probably not be able to invest in directly.
  • Your debt investments are professionally managed by experienced debt fund managers. In fact, debt fund managers trade in debt securities on the debt segment of the stock exchanges with an aim to earn capital gains on these debt securities. This may help you get additional returns on your debt investments.
  • Investing in debt through mutual funds offers you tax benefits too. For instance, interest earned on a bank deposit is tax deductible if it exceeds Rs. 10,000 while dividends earned on your debt mutual funds are tax-free in your hands. Besides, if you hold your debt mutual fund for more than a year, the capital gains you earn are taxed at a reduced rate of 10% [Tax on long term debt mutual funds is 10% without indexation or 20% with indexation, whichever is lower].


So, how do Debt Mutual Funds work?

Mutual funds offer various debt schemes (income funds, gilt funds, short term debt funds, etc.). These schemes invest in a portfolio of fixed income instruments like bonds, debentures, treasury bills, commercial papers etc.

A debt scheme can be an ‘open ended’ one or a ‘close ended’ one. An ‘open ended’ scheme is available for investing all the time while a ‘close ended’ scheme is available for investing during the New Fund Offer (NFO) period only, and is later listed on the exchange where it can be traded.

Mutual funds collect money from investors in a debt scheme and then invest this money in debt securities as per the scheme’s objectives.

Just like equity is bought and sold on a stock exchange, there is a debt market where fund managers trade in debt securities. . While most securities are traded over the counter, Gilt or Government Securities are traded on the NDS platform, operated by the Reserve Bank of India. The market price of a debt security varies with interest rate movements. So, a portfolio of debt securities could incur capital gains or losses depending on the interest rate movement at the time of sale or valuation. This gain or loss is realized at the time of sale of the security and is typically reflected in the NAV movement of the debt scheme.

Please remember that Debt Mutual Fund investments are subject to interest rate risks due to fluctuations in interest rates prevalent in the economy.

(Source: ICICI Prudential write-up on


Col (retd) Sanjeev Govila

CEO, Hum Fauji Initiatives

Visit our Blog, or facebook page or follow us on Twitter!/humfauji  to get latest insight on matters financial

22 Jan 2014
Why Mutual Fund investors usually end up on the Losing Side-

Why Mutual Fund investors usually end up on the Losing Side

For mutual fund investors in India, getting the timing wrong seems to be the norm. An analysis by ET Intelligence Group shows the average retail investor buys mutual fund units when the market is trading at above-average valuations and sells when shares are priced attractively (for purchase). The result: he ends up on the losing side.

One of the reasons for this is that individual or retail investors make their investments without doing much research, and their decisions, more often than not, are influenced by sentiment, say experts.

“Low valuations indicate pessimism about the future and in such an environment investors find it difficult to take risk and, hence, stay away from investing in equities,” said Ashish Ranawade, chief investment officer at Union KBC Mutual Fund. On the other hand, share prices at higher P/E ratios, means growth expectations are high. This happens after two or three years of consistent growth, Ranawade added.

In seven out of the past 10 years, when the benchmark S&P BSE Sensex had been trading at lower than its 10-year average P/E ratio, redemptions in mutual funds had exceeded purchases, show data. On the other hand, inflows jumped considerably when the ratio was higher than the average. When equities are quoting low, retail investors find it difficult to see through near-term turbulence, such as weak business environment, poor job market and uncertainty about corporate performances.

Though there are many risks, returns are usually higher for those who invest in an uncertain market. However, more sophisticated investors, such as foreign funds, buy shares when valuations are lower.

In the past two years, when the average Sensex P/E was 17.2 — lower compared with the index’s average five-year P/E of 18.6 – there were net redemptions of Rs 41,373 crore. On the other hand, FIIs pumped in more than Rs 2.42 lakh crore during the same period.

“Most retail investors do not understand that equity mutual funds are forwardlooking investments. Instead, they look at the past performance of a fund and decide to redeem their investments,” said Pankaj Murarka, head of equities at Axis Mutual Fund. “In doing so, they lose on attractive valuations and, hence, reasonably good returns.”

The Sensex is trading at a P/E of 17.3, marginally lower than its 10-year historical average. This is because of the current state of the economy, a fund manager at a leading fund house said. “Growth expectations are low. Certain pockets in the markets will not do well… capital-intensive industries are not doing well. There is low capacity and, hence, lower earnings,” he said.

According to this fund manager, those who invest in mutual funds now should do that through systemic investment plans to spread the risk and increase investments when there is growth in income.

(Source: Economic Times, 22 January 2014)

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