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Jul 12, 2012, 08.23 AM IST
In the market pitfall, where the equities are delivering negative returns debt instrument have stood strong by providing stable returns. Among debt products, one instrument that has grab investors attention is ‘Debt funds’ by Mutual funds. Read this space to know about the different types of debt funds prevailing in the market.
In a bear market it is often seen that investors opt for debt instruments to get stable returns. They also go in for debt instruments to have the right mix of debt exposure in their portfolios. The main objective of debt funds is to preserve the principal amount accompanied by humble returns. Investment in debt funds are also suggested for investors with a short-term investment horizon. Investors looking at a long-term horizon should look at investing in multiple debt instruments and diversify their portfolio.
An investor has multiple options while investing in debt-related instruments according to one's investment horizon, risk appetite, and liquidity preference. There are varied instruments available currently like debentures, CDs, CPs, government bonds, bank deposits, PPFs and debt mutual funds.
Mutual funds also provide a spectrum of debt-based products catering to the investment needs of corporate as well as retail investors. Recently when the equity market was volatile, debt instruments were the most sought after. Debt mutual funds gave sizeable returns last year as interest rates were on the downside. The foremost advantage of investing in debt mutual funds is diversification of credit risk and transparency of investment along with other advantages of a mutual fund.
Types of Debt Mutual Funds:
Income/ Debt Fund: Income schemes generally invest in fixed income securities. Such funds are less risky as compared to equity schemes as they are not affected by fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of changes in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa.
Floating Rate Funds: Floating rate funds invest about 65% to100% of their corpus in securities, which pay a floating rate interest, while the rest is in fixed income securities. The price of floating rate bonds also fall when rates go up, but the fall is lower as compared to the fall in the price of fixed income bonds. The coupon on floating rate bonds rise periodically as interest rates rise and the investor is protected in terms of interest income.
Fixed Maturity Plans (FMPs): FMPs are debt schemes where the corpus is invested in fixed income securities. The tenure can be of different maturities, from one month to three years. These schemes are close-ended in nature.
Monthly Income Plans (MIPs): MIPs, as they are more popularly known, fall in the category of mutual funds that invest mainly in debt instruments. Only about 10-20% of the assets are allocated to equity stocks. But the very name - monthly income plan does not guarantee a monthly income. Like any other fund, the returns are market-driven. Though many fund houses strive to declare a monthly dividend, they have no such obligation.
Short-term Plan: Such funds invest largely in short-term fixed income securities and maturity of papers is short-term in nature.
Ultra Short Term (Liquid Plus): Ultra short-term debt funds invest in money market instruments such as certificate of deposits, commercial paper and treasury bills, either on an overnight basis, ten days or a month. Liquid Plus funds have no entry and exit loads in most cases.
The returns of debt funds are based on the interest rate fluctuations. The government borrowing programme being intact and the RBI showing no signs of reducing the interest rates, the volatility is expected to continue for some time.
Source: Nirmal Bang
Tags: Debt Fund, Floating rate funds , Fixed Maturity Plans (FMPs), Monthly Income Plans (MIPs), Short-term Plan, Ultra Short Term (Liquid Plus)
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