Debt mutual funds invest in fixed income securities like bonds, treasury bills, government securities, Money Market Instruments, and any other debt instruments. Such debt mutual funds are available in the form of Monthly Income Plans (MIP), GILT funds, Fixed Maturity Plans (FMP) etc.
Debt Mutual Funds are different from regular equity mutual funds and offer various other advantages which seldom are known. This article will sum up everything with respect to Debt Mutual Funds and its relevance in current scenario.
How debt funds are advantageous and when?
Capital gains are long term only if the debt mutual funds are held for 3 years or more. If you want efficient-taxability of the capital gains on mutual funds, then you can be invested in mutual funds for the period of 3 years or more. Such long-term capital gains are allowed benefit of indexation and 20% tax rate is applied after such indexation. Hence, these funds can be used as tax management tool for those who are in high tax bracket.
Market linked returns
Debt mutual funds generate superior returns as compared to other conventional fixed income securities, especially where the interest rates are falling. Reserve Bank of India is cutting rates from quite some time now and in recent monetary policy it changed it’s accommodative stance to neutral by keeping repo rate unchanged at 4%. Looking at falling interest rate scenario, we have experienced that this has resulted in reduction of interest rates of bank fixed deposits. On the contrary bond prices have risen as they have inverse relationship with interest rates. This will lead to increase in returns from the debt mutual funds. Since there won’t be major interest rate rise in coming future, debt mutual funds can be a safe bet for risk adverse investors to earn better returns as against bank fixed deposits etc.
Better liquidity as compared to bank deposits
Bank deposits are not transferable and cannot be withdrawn partially or even are levied premature withdrawal charges for premature full withdrawal. Debt mutual funds stand in a better position with respect to liquidity as it can be partially redeemed or withdrawn. However, keep a check on exit load within lock in period which may be between 6 months to 3 years. Some of the debt funds levy exit load of 0.5% to 2%, if redeemed or sold within lock in period.
Superior returns and moderate risk
Since, falling interest rates make debt fund returns look good, these funds can even give you more than bank fixed or recurring deposits, at slightly higher risk than conventional bank deposits (due to interest rate risk).
Even in case of global economy impact on domestic economy, the investor can minimize such incidence of global recession or slow down, where FII may take out capital and returns from equity market and flee. This may result in chaos in stock markets and ultimately hamper your equity related mutual funds. So, you can stay safe by investing in debt mutual funds, which may fetch lower returns as compared to equity funds (but higher than conventional bank deposits) but may be a lot safer.
Current economic situation and Debt mutual funds
Pause on Rate cut by RBI
In the current scenario where RBI has put a hold on further rate cut in recent announcement of monetary policy, What should you do as a Debt Mutual Fund investor?
How will it impact Debt Mutual Funds?
Well, debt market will not be impacted much and looking at falling interest rates as RBI has already cut 115 basis points starting this year and is expected to reduce further in future, it is suggested to focus on shorter duration funds, corporate bond funds, banking funds, PSU funds. Also, stick to AAA funds.
As RBI consecutively been implementing the Repo rate cut, resulting the interest rate to fall. This has resulted in downward trend in bank deposit rates and any other conventional investment instrument return rate (which is linked to Repo rate). Currently, bank allows interest rate of 6.5-7% interest rate, maximum interest rate on deposits being 7-7.65% for senior citizens. This situation is perfectly ideal for investment in debt funds as it is moderate risk investment alternative but with superior returns as compared to bank deposits.
Global slow down owing to COVID-19
As stated by RBI governor,”Global economic activity has remained fragile; surge in COVID-19 cases has subdued early signs of revival.”
The stock market in recent time has been very volatile. This economic slowdown owing majorly to lockdown amid COVID-19 and volatile stock market is making many investors nervous and confused about their investments.
Foreign Institutional Investors (FII) are the entities which are affected the most by the market trends and economic changes. So whenever, stock market is going through volatile phase, FII will sell out, causing the stock market to come down even further. This will disrupt the equity linked mutual funds, so this is a right time to go for debt mutual funds amid uncertainity, since these funds invest in government securities and other fixed income securities.
Ideally, the current economic situation is better for investing fresh money in debt mutual funds as they fetch better returns than bank FDs and are less risky than equity and equity linked mutual funds. Thus, for short term goals, it is recommended to go for Debt Mutual Funds.
Stay Safe, Stay Invested!
Over the years, we have been hearing about the stories of people turning out to be the billionaires overnight, but is it really so? Who doesn’t want to be? Even I want to be one. Well! But the fact is that tycoons like Warren Buffett, have actually built their own empires with investments on buying right and sitting tight.
Having said that; let me ask you, what are your financial goals and what are you doing to achieve them? You keep a hold of a secured job with good salary package, commercial independence, but still more is needed. Sure! You must be doing savings on the earnings. So, what do you do more to grow the assets? If you have ever thought over investments, you must have surely heard about investing in SIP, i.e., Systematic Investment Plan.
“What is SIP?” It’s is the simplest, organised and a convenient way to fulfil your dreams.
The core behind this is that you invest a fixed amount every month or quarterly over a period of time in the mutual funds. However, the NAV (Net Asset Value) of the fund might vary each month; whereas, on the other hand, you can also increase with the committed amount along with the rise in your source of income to avail more benefits of when you invest in SIP.
Is your mind wondering whirls of questions about investing in SIP? Hold your thoughts! Here are the facts that will give you clear idea about it. Let’s have a look at that:
- Easy investment
“But I don’t know about mutual funds, so what do I do now?” you had this question in your mind. Didn’t you? Relax! If you are amongst those who cannot give full time attention to the stock market or the early investors who just have a vague knowledge about the finance and budgeting, you can undoubtedly invest in SIP. It is reliable. SIP doesn’t ask necessarily for big-time investment, you can start with a fairly small amount too.
- Better returns
Turning back the pages of market, when we look into the past decade, the average inflation rate has been about 7% p.a. and a couple of years back; which has gradually paced down. If we consider the capital market return, a person who is willing to invest in SIP can have CAGR (Compounded Annual Growth Rate) of around 15% p.a. in the long term i.e 5 years or more. It clearly shows that comparative to the other options to put the money in, investing in SIP has beaten the other asset classes. This is a good value for money.
- Investment in small chunks
Investing in lump sum is not what everyone can afford to do so. Also, when you are not sure about the market, where you never know if the market is running at its peak or trough. Thereby, when you invest in SIP, it turns out to be a life saver for you. As you cannot do large investment, devoting in small chunks overtime leads to good monetary benefits in long run. Of-course, it feels a bit stress free when you know that you will not lose the valuable amount if the market goes down.
- Don’t worry about the market
Even if you invest the regular amount that you had committed for the investment when the market is low, you are not adversely affected by it. Instead, many of the sources suggest doing more here – yes, invest in SIP. With this investment, you can also benefit from rupee-cost averaging. No worries about the inflation in market as the average investment shall balance out with the funds.
- Long term savings
If you have the habit of savings, and you invest in SIP, it will ultimately lead to good long term returns. It is like when you take a decision to make yourself fit and fabulous, you start the daily work out because you trust that you will undoubtedly see the good results in some time. Similarly, you shall definitely experience the power of compounding when you regularly invest over a period of time.
- Tax Benefits
Just like there are tax saving government securities, FDs, there are also tax saver mutual funds to cut down your tax bill, one of which is ELSS SIP’, i.e., Equity Linked Saving Scheme. However, the according to section 80C, the maximum limit of investment is up to Rs. 1.5 lakhs.
- Achieve your financial goals
We are living in a generation where our needs are increasing day by day. And to fulfil those, savings in bank will just not do. On the contrary, if you invest in SIP starting with a small amount, you take the advantage of the investment along with the dividends and capital gains too. Isn’t it a win-win situation for your short-term and long-term goals!
- Minimize risks
It is because you regularly supply a deliberate amount over a period time, the gross investment is averaged. And hence, reduces the risk factor of being unfavorable by the fluctuations happening in the market. If you still aren’t sure about long-term financial goals, do talk to your financial advisor about a proper plan. When you invest in SIP, it acts as a stepping stone for to reach your goals.
The below quotation of Warren Buffet fits rightly, when you have made a decision to invest in SIP.
“Someone’s sitting in the shade today because someone planted a tree a long time ago.”
Indeed, I am investing in SIP. What about you?
There are a few things you should know about before investing in any mutual funds. AUM, which stands for Assets Under Management, is one of those things. AUM is one of those key points that you should look into before investing in a mutual fund by any finance-based establishment apart from the expense ratio, their overall reputation and other basic requirements.
Say you are planning to invest in some specific mutual fund. There will always be other people who have invested money in it as well. When all the money invested by everybody is added up, the number you arrive at will be the Assets Under Management. This article will walk you through all the aspects of AUM to make you choose wisely if you are planning to invest in mutual funds.
Assets Under Management
Assets Under Management are equal to the complete value of capital or assets in the market that the mutual fund has. The manager of the fund is responsible for managing the assets and taking wise investment decisions on behalf of the investors. It is a measure of the expanse and professional credibility of the establishment.
AUMs can also be used as a measure of comparison while choosing a mutual fund to invest in. You can easily look up the AUM through various timelines to compare different fund houses and their mutual funds. It also includes returns gained through the mutual funds themselves. Based on the investment mandate, the fund manager can choose to invest further, or distribute the dividends among the investors.
The AUM value depends a lot on market fluctuations. The value is proportionally based on the profits gained and losses incurred, which also determines the mutual fund fee. Lesser the value, lower the fees. Different fund houses generally use various methods to fix the value of the fund fee.
Importance Of Considering AUMs Before Investing
Most people often look at the mutual fund company’s AUM before they consider making an investment in a mutual fund. Needless to say, a higher value attracts more investors. This comes from the sense of having more people put their money and trust in the specific mutual fund. However, apart from the AUM value a few other things should be looked into as well. These are the expense ratio, flexibility and security of the investment mandate and the reputation of the person managing the fund. AUM value is viewed differently when applied to different kinds of funds. Let’s try and understand how that happens.
- EQUITY FUNDS:- More than AUM, what matters here is the fund house’s compliance with the investment mandate and the overall returns. There should be a certain benchmark through any high or low phase in the market. So we see that it all comes down to the fund manager’s skill to gain profitable returns rather than size or popularity.
- a) SMALL-CAP & MID- CAP FUNDS:- Here, you should mostly stick to Systematic Investment Plans (SIPs) and avoid lump-sum investments. This happens because the fund itself becomes a priority shareholder in that company if the AUM grows beyond certain limits. This also limits funds from trading its shares during a market fluctuation.
- b) LARGE-CAP FUNDS:- Investors depend a lot on AUM when it comes to large-cap investment funds. People normally compare the AUM value between two companies offering similar kinds of mutual funds. Other than that, the growth consistency is also compared.
- DEBT FUNDS:- AUM is of utmost importance here. A debt fund that has more capital value can invest through more securities. This can increase fund returns since it reduces the expense ratio. At the same time, having more assets can help the company discuss more reasonable rates with the debt issuers.
Effects of Having High AUM Value on Mutual Funds
Many theories comment differently on the AUM values having positive or ill effects on the mutual fund and the company. A higher AUM value does not ensure a good or a bad performance by the fund. The onus is on the fund manager. If the manager is wise and makes the right investment decisions based on the market trend or situation, he/she might be able to take quick calls on behalf of the investors. Comparing the overall performance of the fund over time is important before you invest.
As mentioned before, different fund houses have various ways of calculating their AUM. A consistency in gains will always ensure a rise in investment. Positive performances attract more investors and newer assets, which leads to a higher AUM, just as a lesser market value will dip the value of the assets. Similarly, if an investor wishes to redeem their share or the fund closes unexpectedly, the AUM will decrease.
AUM and Expense Ratio
Generally, the mutual fund fee depends on the size of the fund in consideration. It is also known as the management fee. It is normally calculated based on the portions of units held by the investors. However, the mutual fund performance bears no direct effect on the fund fees. It mainly includes the charges of the administration and the fund manager’s compensation based on his efforts. The overall annual costs needed to operate mutual funds, is known as the Total Expense Ratio (TER). The Security and Exchange Board of India (SEBI) has instructed that AUMs must always be higher than the TER.
In short, AUM is one of the key points you should look into based on the kind of mutual fund you are planning on investing in. The AUM value says a lot about the mutual fund and the reputation of the company.