There is growing awareness of mutual funds in our country among retail investors. Retail mutual fund folios grew by over 15 lacs, a new record, in the quarter ending September 30, 2015. This was the fourth successive record quarter on quarter retail mutual fund volume growth. However, the vast majority of retail investors in India associate mutual funds with only equity as an asset class. The reality is that mutual funds offer a large variety of products that cater to a wide spectrum investment needs and risk profile. There is very little awareness of debt mutual funds among retail investors. As far as short term or medium term low risk investment is concerned, bank fixed deposit is almost an automatic choice for most retail investors. However, over the past one year, fixed deposits interest rates have come down by 1%, making it challenging for investors who rely on fixed deposit interest as a source of income. On the other hand, if you look at the performance of debt mutual funds, you will see that across the entire range of investment tenures, mutual funds in different debt categories have given significantly higher returns than fixed deposits. Fixed deposits are risk free investments with assured returns, while debt funds have an element of risk associated with it. However, risks involved in debt funds are very different from risks involved in equity funds. The risks involved in debt funds are not only much less than that of equity funds, but it is also easier to understand, once we grasp the concepts related to debt investments. As such, if you understand the risk return characteristics of debt funds and you can make appropriate investment choices, you can get significantly higher returns on your short term to medium investments. In this blog, we will review a great debt fund scheme for short and medium investments, Birla Sun Life Medium Term Plan.
The chart below shows the trailing annualized returns of Birla Sun Life Medium Term plan and average category returns of Short Term Debt Funds over 1 year, 2 years and 3 years investment tenures.
Compare this with the post tax interest on your fixed deposits. Birla Sun Life Medium Term Plan would have given you much higher returns than your Fixed Deposit interest. You should also note that, over investment tenures of three years or more debt mutual funds are much more tax efficient than fixed deposits but more about that later.
The chart below shows, the annual returns of Birla Sun Life Medium Term Plan and Short Term Debt Funds category since 2011. Again we can see Birla Sun Life Medium Term has outperformed the Short Term Debt Funds category and posted double digit returns almost every year.
Birla Sun Life Medium Term Plan is a short term debt fund, but if more accurately categorized, it falls in the category of, what is known in mutual fund parlance as, Credit Opportunities Fund. Short term debt funds are debt mutual fund schemes which invest in fixed income securities of average maturities ranging between 2 to 3 years. The fund managers employ a predominantly accrual (hold to maturity) strategy for these funds. Credit opportunities fund are a type short term debt funds, where the fund managers lock in a few percentage points of additional yield by investing in slightly lower rated corporate bonds. Despite the slightly lower credit rating of the bonds in the credit opportunities fund portfolio, credit risk should not be a concern for the investor because the funds invest in papers rated A and higher. We will discuss more about the risk later. The scheme was launched in March 2009 and has an AUM of nearly र 4,500 crores. The minimum investment in this scheme is र 5,000. Investors should note that the fund has an exit load of 2% for withdrawals within 1 year and an exit load of 1% for withdrawals within 2 years. Therefore, the ideal investment tenure for this fund is 2 to 3 years. Maneesh Dangi is the fund manager of this scheme.
As discussed earlier, it is important that we understand the risks involved in debt funds, so that we able to take the most appropriate investment decisions. But before we discuss risks, we should discuss how debt funds generate returns. Since debt funds invest in fixed income securities, they employ two different kinds of investment strategy:-
Let us understand the risks involved with debt investments. There are, primarily, two kinds of risks associated with debt funds:-
Let us now understand two other important concepts related to debt investments.
While fixed deposit interests are taxed as per the income tax rate of the investor, the tax treatment of debt mutual funds is different. If the investment tenure in debt mutual funds is less than 3 years, then the income from debt funds is taxed as per the income tax rate of the investor. On the other hand, if the investment tenure in debt mutual funds is more than 3 years, then the capital gains are taxed at 20% with indexation benefit. With indexation benefit, your purchase price is indexed at the rate of cost of inflation index in the year of redemption relative to the cost of inflation index in the year of purchase of units. Dividends in debt mutual funds are paid after withholding dividend distribution tax. For debt mutual funds, dividend distribution tax is around 28%. Therefore, for investors in the highest tax bracket, dividend option may be more tax efficient, if your investment tenure is less than 3 years.
Conclusion
In this blog, we have discussed several important factors related to short and medium term debt investments. We have also discussed why Birla Sun Life Medium Term Plan is a great investment option for short and medium term investments. Investors should consult with their financial advisors if Birla Sun Life Medium Term Plan is best suited for their short and medium investment needs.
Aug 29, 2019
Aug 26, 2019
Aug 24, 2019
Aug 19, 2019
Aug 18, 2019
Aug 16, 2019
Aug 4, 2019
Dec 6, 2024 by Axis Mutual Fund
Dec 6, 2024 by Advisorkhoj Team
Dec 6, 2024 by Advisorkhoj Team
Dec 6, 2024 by Advisorkhoj Team
Dec 5, 2024 by Axis Mutual Fund