All debt products..

http://www.subramoney.com/2014/02/all-debt-products/[2/5/2014 1:34:04 AM]

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All debt products..
Let us see what happens when a HNI
wants to build a debt portfolio of his
balance sheet!
Why only a HNI? Simply because a not
very rich person may be happy with 4-
5 PPF accounts (into which he can
invest about Rs. 2-3 lakhs a year),
some bank fixed deposits, etc.
However for a HNI, he has to look at
the following assets:
Savings bank account, bank fixed
deposits, PPF, Tax free bonds, taxable
bonds, and a variety of debt funds
from the insurance basket.
The mutual fund basket products are: liquid fund, ultra short term bond fund,
short term bond fund, income fund, gilt fund, and FMP.
Assuming that the former set of products are well known, let us look at the debt
offering from the Mutual fund industry. What distinguishes them is the
DURATION of the fund schemes. Here we are ranking them from least duration to
highest duration:
1. Liquid fund:
A fund that everybody should have. This should be like your savings bank
account. Whenever you have money which you think is excess it should lie in this
account, in the GROWTH mode. Unlike your savings bank account, this account
gives you CAPITAL GAINS and hence you will pay lesser tax say 10% instead of
30% that you pay on the savings bank interest. Also the returns could be greater
than a savings account but it could be lesser than the return you could get
from a bank fixed deposit.
2. Ultra short term bond fund:
This has a greater duration than a liquid fund, but lesser than the other funds
mentioned here. If you have a time duration greater than a few days say a few
months 100 days this fund could be a better option compared to a liquid
fund. However the returns on this fund maybe very close to a liquid fund, and
may not really matter. However if you know that you require the money after 130
days it might make sense to be in an Ultra short term bond fund.
3. Short term bond fund:
When you have money for slightly longer duration of say 12-18 -30 months you
could look at this fund. Obviously this fund could give a higher return than the
earlier 2 funds, but now the funds start getting a little riskier. When Interest
rates go UP bond funds lose VALUE. How much value they lose depends on the
duration of the fund. The first 2 funds have a very low duration, hence the
impact is minimal. However the short term bond fund could lose some value.
There is absolutely no need to panic you have a 30 months view, so there is a
good chance that the notional loss could be made up.
4. Intermediate bond fund (upto 6-7 years duration)
Funds with higher maturity! this is likely to give you a good return, but carry a
higher risk when interest rate changes.
5. Long bond fund (more than 8 years duration)
These funds invest in corporate bonds with longer duration. As India does not
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All debt products..
http://www.subramoney.com/2014/02/all-debt-products/[2/5/2014 1:34:04 AM]
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have many instruments in this genresome portion of these funds go into GILT
Hdfc Income fund has about 50% in gilts! These funds are very safe from a
default point of view, BUT VERY RISKY from any adverse movement in the
interest rate in the country.
6. Gilt and Long tenure bonds
If you have a real long term view then you can look at gilt funds with say 15
years duration. This is the riskiest set of bond funds! However if interest rates go
down these funds will go up the maximum. For just a slight fall in interest rates
you could see a fantastic jump!
So a HNI has to build a portfolio with a little of all of this and hope to
dynamically be in the best combination at any point in time. Or he could be in a
Dynamic Bond fund..
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What is an IPO?
Doctors selling their practice? part 1
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Pehredar mis-selling episode.
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7 Responses to All debt products..
B on February 4th, 2014 at 9:13 am
Agreed. but sir,,.if you compare historical long term returns liquid funds
have matched or only slightly underperformed(if not outpaced) returns by most
of the other riskier debt mf options.rate sensitive options average out over a
long timeso why not stay in liquid funds??? unless ofcourse you want to time
interest rate cycles for say few quarters
Anurag on February 4th, 2014 at 11:14 am
Floating Rate funds are also good options for medium term.
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All debt products..
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ramprakash on February 4th, 2014 at 12:00 pm
Hi Subra
The CAPITAL GAINS you mention under liquid funds is in fact applicable for all
type of debt funds, but is only applicable if the holding period is atleast 1 year
and above. Else it will be considered as income under other heads and taxable at
individual tax slab rate.
Nitin on February 4th, 2014 at 12:01 pm
Sir
What about using Yes/Axis bank savings account (7% returns) as an alternative
to Liquid Funds?
Thanks
Nitin
mylearningcafe.blogspot.com
mymoneyrules.blogspot.com
Mohana Ganesh on February 4th, 2014 at 1:39 pm
Very informative. But this applies only to HINI. Correct me, if I am wrong.
Milind on February 4th, 2014 at 4:34 pm
Hi Subra ! Good Input for HNIS
subra on February 4th, 2014 at 6:07 pm
of course Mohana it applies to you also. You are a HNI.
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