Debt mutual funds offer more tax benefits and returns than other fixed income instruments.
Debt investments are a part of most portfolios. These work as a shock absorber for investors by delivering stable, though not very high, returns. Among the debt instruments available, debt mutual funds are one of the most recommended, especially when interest rates are falling -- they have delivered double-digit returns in the past two years and are tax efficient (see Tax Gains).
However, a few recent incidents have got investors worried. Those who had invested in four debt funds of Taurus Mutual Fund were in for a shock when net asset values, or NAVs, of their funds fell 7-11 per cent in a single day in February this year. Such losses are difficult to digest even for equity fund investors. The reason for the fall was the downgrade of rating of debt papers of Ballarpur Industries in which the funds had invested. This is not the sole instance of debt funds delivering negative returns. In August 2015, two schemes of JPMorgan Mutual Fund had suffered losses due to downgrade of debt papers of Amtek Auto.
BE INFORMED
These incidents highlight the inherent risks in debt funds that mutual fund investors should be aware about. Among debt securities, there are different instruments that a fund can take exposure to. These include government securities, certificate of deposit, commercial paper and nonconvertible debentures. The funds’ performance will depend on how the underlying instruments are doing.
“The extent of fall or rise in prices of fixed income securities is a function of the coupon rate, days to maturity and the increase or decrease in level of interest rates,” says Avnish Jain, Head, Fixed Income, Canara Robeco Mutual Fund. There are two types of risks that these funds carry.
Credit risk:
This story is from the July 02, 2017 edition of Business Today.
Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 8,500+ magazines and newspapers.
Already a subscriber ? Sign In
This story is from the July 02, 2017 edition of Business Today.
Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 8,500+ magazines and newspapers.
Already a subscriber? Sign In
Leapfrogging Into The Future
Gen AI is the future. In India, this revolutionary technology has already penetrated deep into the country's banking sector
The Visionary
In a career spanning nearly four decades, Uday Kotak, a firstgeneration entrepreneur, has not only created a bank of size but also built an institution, which offers a wide range of financial services, from asset management and insurance to securities
Is The Tie Dead?
Maybe not. But it is no longer de facto office wear and is slowly being reduced to something to be worn only on special occasions
"Bring in experts to understand customers"
Qualcomm-backed ideaForge Technology is a Mumbai-based drone manufacturer
SHAKING IT UP
AMERICAN PHARMA MAJOR ELI LILLY SEES INDIA AS ITS LAUNCHPAD FOR A NEW GROWTH TRAJECTORY, USING ITS NEW DRUGS FOR DIABETES AND OBESITY AS THE FUEL. WILL THIS STRATEGIC PIVOT WORK?
"Besides China, no one can match the scale that India offers"
Romal Shetty, CEO of Deloitte South Asia, says innovations coming out of India are being replicated globally, and the country holds great strategic value for the Big 4 firm
PICKING THE WINNERS
The methodology used for the Business Today-KPMG Best Banks and NBFCs Survey 2022-23
THE SMALL FIRM'S BEST FRIEND
Lendingkart, a fintech that posted its highest-ever PAT in FY23, is making credit available to MSMEs in India's far-flung areas
HELPING HAND
From helping financial institutions with e-verifications to aiding them in fraud detection and prevention, Perfios is bridging the gap between data and insights
THE OMNIPRESENT PLATFORM
Fintech major Razorpay has undergone many diversifications. Yet, its core premise remains the same: make the movement of money simpler