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

How to get benefit from interest rate cut?

How to get benefit from interest rate cut?

These types of questions commonly asked and discussed in the investors or fund managers forums. What should you do in current scenario when majority of analyst expect rate cut within a year as government’s fiscal deficit number and Indian rupee dollar exchange rate also improving. We have already seen rupee dollar exchange rate around 60 and expected even below from current 60.

As a gilt fund are most interest rate sensitive so to take advantage from interest rate cut investor should go with these types of fund. Although it is tough to predict when rate cut will happen so there may be some wild moment happen in NAV of these types of fund. But if you have time horizon around 2 year you should definitely go with long duration fund to take advantage of interest rate fall. There are chances of double digit return from the long duration fund.

For example, if fund’s yield to maturity (YTM) is 10% and modified duration is 3 year. In this case if interest rate cut by 100 bps point then the total return would be (YTM+Modified Duration) 13% and if interest rate go up by 100 bps then the return would be 7%. If the interest rate remain unchanged, in that case investor earn around 10%. The return is totally depend on interest rate movement.

Many fund house like Franklin Templeton, Birla Sunlife, IDFC, HDFC etc. offering very attractive debt funds. Investor should have the patience to wait for the rate cut. For those who do not have risk appetite and cannot wait for one and half or 2 year, those investor should invest in short term bond fund.

If you have more than one year time horizon and do not want take any risk in that case you should go with FMPs (Fixed Maturity Plan) as it give indexation benefit also.

For all our investors and readers Happy Navratri, Happy Nav Vikrami Samvat and Happy Gudi Padwa. I wish for all of you happy and prosperous life. 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

Do you know about Gilt Fund ?

What is Gilt Fund? This question every time flash in our mind whenever we hear about it on business news channel or business news paper. Now a days it is the flavor of season as equity market has not given impressive return as expected from almost 5 years. According to recent data, now the retail people are also increasing their participation in debt mutual fund day by day. In India, debt market knowledge is still in very nascent stage among investors.

So it is very important to understand the product before investing. At least you should have basic understanding about the product. Without proper knowledge and understanding of the product often don’t prove a good return investment.

Gilt funds are fixed –income mutual funds that invest in G-secs (government securities). Bond prices and interest rates are inversely related. When interest rate falls, bond prices rise. In current scenario, falling in interest rate return expected so these funds may be prove good investment.

These funds invest in G-secs from as low 2 year to 15 year. There are basically 2 most frequently used terms, average maturity and duration. Average maturity reflects the tenor of a gilt fund’s portfolio and duration measures the sensitivity against the interest rate movement. At the time of interest rates fall, long term bond and G-secs give more return than short term bonds. Now, it is clear that high duration bond react more to interest rates movement.

Most advisers promote it as a risk free fund but it is not true. Investments in gilt funds are always vulnerable to interest rate risks. So if interest rates are moving upward direction then long term duration bond may be erode your capital or give you negative return also.

Now the question arises, when should person invest in these funds?  A slowdown in GDP growth, rising inflation, a poor IIP (Index of Industrial number these all are indication of high interest rates. Whenever you feel, the interest rates would fall in near term that time is good time to invest in these funds. In a nut shell, you should have better understanding of interest rate cycle and economic environment of the country. If you hold the fund for the defined average maturity, you will not lose your money likely.

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