Debt Fund : Interest rate movement impact

Debt Mutual Fund: Interest rate effect

In India, the reach and awareness of mutual fund is still very low. People do not understand the difference between equity and debt asset class. Investors often consider all type of mutual fund in the same way. Today we will discuss about the impact of interest rate movement on debt mutual fund.

In debt mutual fund, we can divide it into three broad categories liquid fund, FMP and Income fund. Liquid fund has very low volatility and government bonds are very high volatile product in short term. On the basis of historical data of interest rate movement and debt fund return we have arrived on some facts.

Whenever the expectation of interest rate is going towards up then investor should be defensive and should consider liquid fund or FMP fund. The difference between liquid and FMP funds is nothing but the time period. Liquid fund is suitable for short term investment like 1 or 2 months. FMP is for the fixed lock in period investment and do not get affected from interest rate movement at the time of maturity. The only risk in the FMP is opportunity loss if any arises during the investment period.

During the falling interest rate scenario, long term bond investors get benefit. In longer maturity bond portfolio, one term called modified duration play vital role for return generation. For example, two long term duration funds have modified durations 4 year and 7 year. If interest rate moves down 1% then 4 year’s modified duration fund would generate 4% additional return whereas 7 year’s modified duration fund generate 7% additional return. But unfortunately if interest rate goes up 1% then these funds generates negative return according to the modified duration. Exposure in long term bond fund should be taken according to the risk appetite of investors.

If you want more information regarding investment or you have any other query about investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

www.arvindtrivedicfp.blogspot.in

Debt Investment: Part 2

Debt Investment: Part 2

We are discussing about investment asset classes in these days. In the last blog we had discussed about debt investment. In today’s article, we are going to talk about debt investment products and its suitability. In our country, the awareness about debt mark is not as wide. Some debt investment avenue we are going to discuss below:

Government Securities:

It is issued by the government of India through RBI for borrowing from the public to meet various spending. In simple term government take loan from public and return that loan on fix date with fix interest rate. It is the safest product in debt category for capital protection and return. It is also known as gilt securities. Gilt securities include all government bonds, T-bills, state and central govt run instruments.

Post office saving schemes:

It is very famous among the investors as some of post office saving schemes gives saving option and tax benefit both through various schemes. It comes with different investment tenure and return rate. It provides safe investment opportunity to the investors. It is the one of the largest saving vehicle for the investors.

Public Provident Funds (PPF):

PPF is also a saving tool for wealth accumulation in long term. It come with 15 year lock in period and provide fix rate of compounding interest. The rate of interest announce by the govt every year. The investment in PPF and return from PPF both are tax free. The tax saving investment limit in PPF at present is Rs 1 lakh. Many banks are providing PPF facility in these days.

Debt Mutual Fund:

Investor can access debt market’s benefit investing in debt mutual fund. By investing in debt mutual funds investor get the benefit of various type of investment as debt mutual fund deploy their money in various government securities, corporate debt, bank securities etc. The main aim of these mutual fund are to provide capital protection with income generation. It comes with different maturity period so according to the need investor choose schemes very carefully.

Bank fixed Deposits:

It is traditional investment avenue for the investors in our country and is very popular among the investors. It comes with different maturity period. Rate of return on these fix deposits are taxable. Its post tax return is even not able to beat inflation but it is still popular as investors have a lot of trust in bank for capital protection. Keep in mind, fixed deposits upto Rs 1 lakh are covered under DICGC (Deposit Insurance and Credit Guarantee Corporation).

Corporate deposits, bonds and debentures:

Many corporate issues bonds, debentures for raising the money and offer a fixed rate of return. These types of investments carry credit and interest rate risk. Many credit agency issue the rating of these types of schemes. Understand all aspects like rating, tenure and return before investment in these types of schemes.

Its Suitability:

It is very good for those investors who prefer capital protection than return. It is less volatile than equity. It is safe bet for conservative investors. It is ideal investment for those whose goal approaching near. Those who needs regular income flow it is good investment for them. Before investment in debt securities, first assess your time horizon and then invest accordingly. There are wide ranges of debt products offer depending on your investment time horizon.

It is very vast subject and we cannot cover it in one article. If you want more information regarding debt investment or you have any other query related investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

www.arvindtrivedicfp.blogspot.in

Debt Investment : Part 1

Debt Investment : Part 1

We have discussed about equity as asset class in details our previous blogs. Now we are moving towards debt investment. Debt means loan. It means borrower have obligation to return money with interest to lenders.

In debt market investor invest money as a loan with issuer at a predefined coupon rate. Issuer may be any institution, banks, government, public sector companies, private companies. Coupon rate is nothing but interest rate which issuer pays to the investors at predefined regular interval.

Advantage and disadvantage of debt investment:

• It is less volatile than equity market. Conservative investors invest in debt market for safety of principal amount. They feel more comfortable in debt compare with equity investment.

• In debt investment, investors get regular cash flow in the form of coupon which is predefined. Investors get coupon income at regular interval.

• It works on interest rate moment. The bond prices increase when interest rate goes down and investor can take advantage of capital appreciation.

• The return on debt investment is fixed. That is the reason investors feel more comfortable in this investment.

• However, it has less risk than equity but it gives low return and merely beat inflation. In majority of debt investment post tax return even not able to beat inflation.

• It is low risk and low return investment and retail investor cannot direct participate in the debt market. They participate in the debt market through bonds, debt mutual fund and PPF etc. Right price discovery is also problem in debt market.

• Debt investment has interest rate risk and credit risk also. We will discuss further about these risks in our further blogs.

We will discuss in our next blog about the various available debt avenues and its suitability to the investors. If you want more information regarding debt investment or you have any other query related investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

www.arvindtrivedicfp.blogspot.in

Beware…!!! Stop and think again before any investment

It is my 100^th blog. Thanks to all of you for your great support. Without you it was not possible to reach this figure. A lot of readers has given valuable suggestion and compliment. I have got lot of energy and material for thought during this journey. This journey is not only mine, in fact it is a “revolution of investor awareness” with the help of your participation.

Often, we rely on our friends and relatives for our investment decision. In most cases, these are bank agent, CAs, insurance agent, or so called advisors. For investment decision you don’t need only information, you should understand it better. You should plan for your financial plan yourself with the help of expert. Keep in mind, there is no investment product in the market which can guarantee for high return and zero risk. There is reciprocal relationship between in risk and return.

At the moment when you expect high return, you should also the analyze risk. If any product promises you for high return, then definitely there would be high risk. I request to all of you that never invest with close eye on the basis of trust. For sales agent commissions and targets are more important than you investment return. We often, trust our bank relationship manager and purchase the product on the basis of trust and brand name. After mis-sell the product which you had not required really, they earn huge commission and as the result your return get reduce.

I would like to share with you recent example. One of my clients have HDFC bank account. Client did not want any type of risk and wanted  to fix deposit for 1-2 year. Bank representative suggested him HDFC classic assurance plan for 20 year with insurance and promised 3% of sum assured bonus every year and after maturity there would be terminal bonus. According to the bank representative it was guaranteed benefit but when I had personally met the bank person and senior persons they were not able to show me any brochure about this promised guaranteed benefit. They were only showing me excel sheet on computer and only false oral promise.

Finally, client has also realized and refused the suggested product by the bank. As he was in the higher tax bracket so I suggested him some bond mutual fund it would be beneficial him as a tax point of view as compare with bank fix deposit. At the end, bank representative have also agreed with me that debt fund is better than FD.

I had also mentioned in my past blogs that do not trust any oral promise by any agent, friend or relatives. They will first care their own incentive and not your investment return. It would be better to prepare a financial plan with the help of professional financial planner and then invest accordingly.

For more detail about any other query related investment, you can contact me through my email.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Reversal of entry load is only way to revive mutual- fund industry.....?

If you ask me above question my answer would be certainly not. Bring back entry load is not good for investors at all also. In last few months we have came to know about the news of reversal of entry load in mutual fund through various media. Everyone is debating about this issue including market regulator, fund houses and distributor communities. In 2009, SEBI, abolished the entry load-the initial fee charged by mutual funds from investors to pay distributors for the investor’s interest. But recently, financial advisors requested to the regulator to reintroduce the entry load in mutual fund industry to widen the reach of mutual funds. There is no doubt that ending the entry load has impacted the mutual fund industry to the some extent but the real question is the same is reversal of the entry load for investor’s interest. The interest of the investor lies in being suggested a good fund, starting an SIP in it, and then sticking to it. The distributor should raise level of the quality of the advice for the suggesting good fund in unbiased manner. They should not blame to abolishing entry load for struggling mutual fund industry. In my personal experience I have observed that investor is ready to pay the fee for honest and quality advice to the distributor in the most of the cases. 


For example, There are two way of purchasing the medicine , the one is to direct purchase the medicine from the medical store without consultation of doctor and the other one is  to purchase medicine after consultation of doctor. For consultation we pay fee to the doctor. The same logic work in this industry also. Investors are ready to pay for the quality and unbiased advice.Hoping to restore the industry's fortunes by reversing this decision of banning entry load would be a wrong move for investors.

The end of entry loads was widely and correctly perceived as an investor-friendly act, which addressed the problems of mis-selling and churning to the large extent. Now the competition is for good advice and quality product.  The reasons for the reduced retail inflow were high deposit rates, a volatile, range-bound equity market, and uncertainty over ELSS funds also, not the ban of entry load only.


There are many ways to bring new investors into the mutual fund investment. Here I would like to maintain few of them.

Investor awareness:

Due to the lack of knowledge investor invest into the wrong mutual fund schemes. I was shocked when one of my educated friend related with investment sector once told me that mutual fund only invest in equity market and according to him it is very risky product. For those who want safety of capital this is not right product. Such type of misconception is also responsible for the current status of mutual fund industry. There is really no reason why the fortunes of the mutual fund industry must be pegged directly to the ups and downs of the Sensex and Nifty. While a growing stock market can help inflows into equity funds, there are quite a few other ways to bring investor’s interest in the category.

Promote other category fund also other than equity fund :

Mutual funds just don't manage equity products. They also manage liquid funds, short-term debt funds, fixed-maturity plans, gold exchange-traded funds and balanced funds. These products are eminently suitable for retail investors. (We will discuss these products in detail in the next coming articles) Companies, banks and high net-worth investors reap the benefit of these products. Retail investors, due to the lack of awareness stay away from these products. An awareness campaign on categories such as gold exchange-traded funds or liquid funds can help draw investors into mutual funds. In the current economic condition short-term debt funds are in fact the ideal entry point for a first-time investor into mutual funds.

Investment process should be mad easy :

Now it is mandatory to compile the KYC is compulsory for each investment regardless amount of the investment. This process need should be made more easier. For investing in mutual funds investor need to deal with multiple fund houses, registrars, application forms and account statements. Online transaction portals such as Fundsindia.com, eticawealth.com and Fundsupermart.com have simplified matters.

Rural presence should be increased :

According to the industry data, the share of  rural part of the country in mutual fund is too less. The fund house largely depend upon the urban and metro cities and missing the large chunk of investment amount of rural part. According to the one survey, only 3-4 per cent of households have an internet connection. The industry needs to pay greater attention to investors who don't have internet access too. For this fund house can use traditional avenues such as public sector banks, post offices. Fund house only 20-30% fund get from rural part. So there are tremendous opportunities to reap the benefit through the awareness programme in all the part of the country.

In my opinion only bring back entry load is not the solution for languishing mutual fund industry. Industry can bring new investor from the awareness program, better advice and proper presence in rural india.

Regards,

Arvind Trivedi

Certified Financial planner