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| Decoding debt funds |
| BS Reporter / Mumbai Sep 20, 2009, 00:13 IST |
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I have determined how much money I would like to allocate to debt instruments - a mix of short-, medium- and long-term products. But I'm often puzzled as to when to move into floating rate funds or Gilt funds or income funds or so many other types of funds that make up the debt fund universe. Please advice.
- Ravish
Different categories of debt funds are to be used to fulfil different purposes. Your debt portfolio need not be actively managed. The most important factor while choosing debt funds is their portfolio maturities. The higher the maturity, the more volatile to interest rate changes, which are inversely related to the prices of fixed income instruments.
Liquid, Short-term Floating Rate and Liquid Plus funds are best used to park short-term monies. They invest in money market instruments, and cash and cash equivalents. They can also be used as emergency funds, but are not as liquid as money in the bank accounts.
Short-term debt funds and medium-term debt funds can provide better returns in a longer time frame, say two to five years, as compared to liquid funds. They invest in higher maturity papers such as corporate debt and government securities. Medium-term debt funds are more volatile as compared to short-term debt funds, which in turn are more volatile as compared to liquid/liquid plus funds.
Gilt funds, which primarily invest in government securities, are the most volatile, due to their high maturities. These may go as high as 20 years or even more. They can generate high returns when interest rates are falling, but suffer most when interest rates rise.
Apart from these, there are flexi debt funds which actively move between different maturities, but they are also more risky.
If you are investing for the long-term, then you can use the short-term, medium-term or flexi debt funds, or even bank fixed deposits. Some good funds are Kotak Flexi Debt, Canara Robeco Income, Reliance Short-term and UTI Short-term Income Fund.
I had invested a lumpsum in JM Basic, JM Emerging Leaders and JM Agri and Infra, all of which are giving me losses of 30 to 70 per cent. Should I redeem my investments from these funds and invest in others?
- A C Roy
While JM Basic and JM Agri & Infra are thematic funds, JM Emerging Leaders is an aggressive mid-cap fund. They were among the top performers in the bull run of 2006 and 2007, but fell heavily in the 2008 market decline. In the recent rally, they have again been among the top performers.
Thematic and aggressive funds should, anyhow, not form a big part of your portfolio. They should be usually restricted to 10-20 per cent. Stay invested in these funds only if you can take this kind of risk and volatility, otherwise move to other proven funds. Some good picks among the aggressive funds are Kotak Opportunities, DWS Investment Opportunities, Reliance Growth, Reliance Regular Savings Equity and Sundaram BNP Paribas Select Midcap.
I had invested in LICMF FMP Series 43 (13 months) - Dividend Reinvestment option. On maturity, Dividend Distribution Tax (DDT) was deducted from my maturity proceeds. Is it valid?
- Bharat Desai
The dividends under FMPs are subject to DDT at 14.16 per cent (for individuals/HUFs), and hence this deduction in your case was valid. The dividends distributed on maturity of the scheme are, after deduction of the applicable tax, reinvested in the scheme, and then the proceeds are distributed to unit holders.
Value Research
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