Month: April 2023

Medium Duration Funds are debt funds with 3-4 years of investment horizon.

Investors looking to invest for at least 3 years can park their money in Medium Duration Funds. These funds can cater to your financial goals like buying a property, planning your child’s higher education abroad, or any significant expense happening within 3-4 years. 

These funds can be an alternative to fixed deposits as they deliver superior returns. 

Read along to know more about Medium Duration Debt Funds.

How Do Medium Duration Funds Work?

To create a Medium Duration scheme, fund managers distribute assets among debt and money market securities provided the Macaulay Duration is 3-4 years.

What Is Macaulay Duration?

It is the weighted average number of years the present value of a fixed income instrument’s cash flows will take to match the amount paid for the instrument.

In simple words, Macaulay duration means the average time you will need to recover the initial investment through the instrument’s cash flow.

Please note that- in this case, duration does not mean tenure. Duration measures the value/sensitivity of the principal amount with respect to a change in interest rate. And tenure indicates maturity.

If the Macaulay duration is higher-> the instrument’s sensitivity to the changing interest rate is also higher.

These funds have higher maturity than Short Duration, Low Duration, Ultra Short Duration, and Liquid funds. And lower maturity than Medium-to-Long and Long Duration Funds.

Investors with moderate risk appetite can invest in these funds instead of bank FD.

Top 4 Advantages of Medium Duration Funds

1. Superior Returns

These funds have the potential to deliver superior returns than short-term debt funds and even FDs. 

Due to a slightly longer investment horizon, returns are subject to change in the interest rate cycle. These funds perform well, especially during falling interest rates. 

2. Portfolio Rebalancing

Medium Duration funds can balance the risk of equity mutual funds. The equity market is often volatile. A lot of factors affect the market. 

Debt funds are comparatively safer and more stable. Investors can rely on these funds to keep their portfolios balanced against other investments with similar horizons.

3. Fixed Deposit Alternative

FDs are popular because of their security and guaranteed fixed returns. However, these returns may not be satisfying during falling interest rate scenarios. In that case, Medium Duration funds can replace FDs. 

4. Liquidity

Medium Duration Funds offer better liquidity than Long Duration debt funds. 3 to 4 years is a good enough horizon to earn superior returns and achieve your financial goal. 

Though if you are looking for an even shorter horizon, go for liquid funds, Ultra Short Duration, Low Duration, Short Duration funds.

Things to Consider Before Investing

1. Risk

Debt funds come across interest rate risk and credit risk. 

In the case of Medium Duration funds, a rising interest rate scenario is not ideal. It can lower the NAV of the funds, thereby reducing your returns. Though if you hold till maturity, the risk can be mitigated.

Credit risk occurs when the underlying assets have low credit quality. Though fund houses often maintain high credit quality. 

You can check the fund scheme to understand the underlying assets and their credit quality. 

2. Investment Horizon

Each investor has different money goals, risk appetite, and expectations. For some investors, 3-4 years can be a short-term goal, whereas others might think it’s too long.

It depends on what you are comfortable with. Make sure the investment horizon of Medium Duration Funds aligns with your preferred horizon. 

3. Your Investment Goals

Debt funds can serve multiple purposes. You can rely on debt funds for risk balancing. Or for fulfilling a specific goal like buying a car. 

Among the 15 Types of debt funds, you’ll find a specific scheme for each of your short or long-term goals.

Analyze your investment goals to decide when and how much you should invest in Medium Duration Funds. 

4. Modified Duration (MOD) of the Fund

In the case of Medium to Long Duration Debt Funds, the Modified Duration (MOD) plays a vital role.

Modified duration measures the change in the value of a bond in response to a change in 100-basis-point (1%) change in interest rates.

During the falling interest rate scenario, with each 1% fall, the NAV of the funds goes up by MOD%. If the Modified duration is 6, then the NAV will go up by 6% every time the interest rate falls by 1%.

NOTE: In reality, the interest rate rarely actually falls by exactly 1% in one go. The calculations will modify based on the actual fall in the interest rate. 

Tax Implications

As per new tax rules on debt funds applicable since April 2023: Both Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) will be taxed as per your tax slab. 

Investors will no longer benefit from indexation on Long-Term Capital Gains. 

Who Should Invest in Medium Duration Funds?

Medium Duration funds are ideal for investors who want better returns than fixed deposits but don’t want the risk of equity markets.

Investors who want to balance their equity portfolio can also bring these funds on board. We’d recommend evaluating your existing portfolio to make sure these funds align with your goals. And as said earlier, you’d earn more returns if you invest during the falling interest rate scenario.

Conclusion

Medium Duration Debt Fund can be a game changer if you invest at the right time with the right goal. Your financial goals for the next 3-4 years can be strengthened with these funds.

If you are not a fan of FD, park your money in Medium Duration funds. Not only will you earn superior returns but also achieve portfolio balance.

However, as mentioned above, these funds are more suitable during a falling interest rate scenario. To know more about the effect of current repo rates on debt funds, get in touch with our advisors. We will help you align your portfolio with the suitable type of debt fund. 

Low Duration Funds are debt funds that invest in debt and money market securities with up to 1-year maturity. 

Let’s say you have a big expense coming up in the next 6 to 12 months. For example, a wedding, moving into a new home, or your child’s educational milestone.

Low Duration Funds can make accumulation for these short term expenses easier for you. You can comfortably achieve your goals without significantly increasing the risk on your capital. 

Read till the end to know everything about these funds. 

How Do Low Duration Funds Work?

The underlying securities in Low Duration funds have up to 1 year of maturity. Fund Managers design the scheme keeping the Macaulay Duration between 6 to 12 months.

What Is Macaulay Duration?

It is the weighted average number of years the present value of a fixed income instrument’s cash flows will take to match the amount paid for the instrument.

In simple words, Macaulay duration means the average time you will need to recover the initial investment through the instrument’s cash flow.

Please note that- in this case, duration does not mean tenure. Duration measures the value/sensitivity of the principal amount with respect to a change in interest rate. And tenure indicates maturity.

If the Macaulay duration is higher-> the instrument’s sensitivity to the changing interest rate is also higher.

These funds have a longer horizon than Liquid and Ultra Short debt funds and a shorter horizon than medium to long-term debt funds.

Investors planning to invest for a few months to a year can go for these funds. 

Top 4 Advantages of Low Duration Debt Funds

1. Suitable for Short-Term Investment Goals

Low Duration funds offer better liquidity compared to short, medium, and long-term debt funds. You can invest a lumpsum amount and withdraw it within a year.

Short-term tenure preferences can vary for each investor. Some would prefer liquid or ultra short duration funds for higher liquidity. 

Low Duration funds also qualify for a short-term goal that ranges between 6 months to a year.

2. Lower Risk

In the case of debt funds, the longer the maturity period the higher the volatility. The interest rate cycle can have a massive impact on debt funds.

Debt funds with comparatively shorter tenures mature quickly and blend with the new interest rate. That’s why they perform well during rising interest rates. On the other hand, long-duration funds are suitable during the falling interest rate scenario. 

As the investment horizon is short, Low Duration funds are less affected by the interest rate cycle. 

And as far as credit risk is concerned, fund managers often invest in securities with high credit quality. You can check the scheme details to understand credit risk. 

3. Potential For Superior Returns 

Debt funds often outperform the returns on FDs. FDs can be safe but the returns are not as good as debt funds.

You have a better chance to earn superior returns within a year with Low Duration funds than the FD. And as mentioned above, these funds deliver even better returns when the interest rates are rising or are steady at the peak. 

4. Diversification

Low Duration funds can be great for balancing the risk. If you have invested in equity mutual funds already, add debt funds to diversify your portfolio.

These funds are less riskier than equity funds. By investing in them, you can fight equity volatility to some extent. 

Things to Consider Before Investing in Low Duration Debt Funds

1. Credit Risk

Interest rates are cyclical and the risk arising out of the interest rate movement can be managed. Credit risk, on the other hand, can alter the outcomes. 

The majority of the debt funds, apart from Credit Risk funds, invest in high-credit quality assets. Sometimes, fund managers may bring a low-rated asset into the scheme if it has the potential to deliver superior returns. But overall credit risk is never high. 

We recommend checking the scheme factsheets to understand the credit quality of the underlying assets. 

2. Risk-Reward

Many investors distribute their money among debt funds to balance the overall risk. As equity funds deliver higher returns in the long run, debt funds offer security.

However, debt funds come with variable maturity periods and underlying assets. Liquid funds, Ultra short duration funds, and Low Duration funds offer safety against interest rate risk. But, the returns may not be as superior. 

Low Duration funds are safer than Dynamic bond funds or Gilt funds in terms of volatility. But the returns would be comparatively lower.

Invest in these funds based on your risk appetite. 

3. Investment Tenure

As mentioned above, these funds are more compatible with your goals outlined within 6-12 months. Otherwise, you have more options on the debt fund spectrum based on the tenure. 

Taxation on Low Duration Debt Funds

Before April 2023, investors had a benefit of 20% tax with indexation on long-term capital gains. However, the tax rules have been revised and the above benefit is no longer applicable to funds with less than 35% exposure to equity.

Now, both short and long-term capital gains on debt funds will be taxed as per your tax slab. 

Who Should Invest in Low Duration Debt Funds

The beauty of debt funds is, you can plan a certain expense by investing in specific types of debt funds. Low-duration funds are perfect if you are planning to achieve a milestone within a year. 

By investing your money for about a year, you can earn decent returns and balance your portfolio as well.

You can also start Systematic Transfer Plan with Low Duration funds. Instead of withdrawing your money, you can transfer it into different equity or debt funds in installments. 

STP works like SIP but within funds. Read more about STP here. 

Conclusion

Bigger expenses like a wedding, children’s education, or a new house can be stressful. Fortunately, you can plan it beforehand by investing in debt funds. 

Low Duration debt funds can be really helpful to fulfill your financial goals in the near future. Take advantage of debt funds to make your money work for more money as you plan your expenses. 

You can evaluate the timeline of your next big expense and choose suitable debt funds. 

For more insights on debt funds, contact our advisors. Get complimentary portfolio analysis and restructure your portfolio for better outcomes. 

Ultra Short Duration Funds are debt funds with 3 to 6 months of investment horizon. 

These funds are suitable if you have an expense planned within 3 to 6 months. For example, a down payment for a car or a house.

Ultra Short Duration Funds are comparatively safer than medium to long-duration debt funds and deliver decent returns. 

Read along to know where these funds stand on the spectrum of all debt funds.

How Do Ultra Short Duration Funds Work?

Ultra Short Duration Funds primarily distribute your assets among debt and money market securities, keeping the Macaulay Duration of the scheme between 3 to 6 months.

What Is Macaulay Duration?

It is the weighted average number of years the present value of a fixed income instrument’s cash flows will take to match the amount paid for the instrument.

In simple words, Macaulay duration means the average time you will need to recover the initial investment through the instrument’s cash flow.

Please note that- in this case, duration does not mean tenure. Duration measures the value/sensitivity of the principal amount with respect to a change in interest rate. And tenure indicates maturity.

If the Macaulay duration is higher-> the instrument’s sensitivity to the changing interest rate is also higher.

These funds have a maturity period of slightly more than liquid funds and lesser than short-duration funds. 

These funds are perfect to park your money for a few months.

Top 4 Advantages of Ultra Short Duration Funds

1. Liquidity

Ultra Short duration funds offer better liquidity compared to medium to long-duration debt funds. 

You can keep your money in these funds for 3 to 6 months (or more if you’d prefer) instead of a bank account. These funds can deliver superior returns compared to savings accounts and FDs. 

2. Lower Risk

As these funds mature within months, the interest rate risk is comparatively lower. And as for credit risk, almost all the funds in a similar category prefer to maintain high-credit quality.  

You can always check the credit ratings and performance of the funds before investing. 

Note: The interest rate risk, if at all, is a temporary effect on the fund’s performance. Ultra Short Duration Funds can be your go-to investment during a rising interest rate scenario as their underlying assets mature quickly and capture the new interest rate.

3. Shorter Investment Horizon

Ideally, your portfolio should be a blend of short and long-term investments. You must be planning for both long and short-term financial goals.

Equity mutual funds and long-duration debt funds can take care of your long-term goals based on your risk appetite. Ultra Short and Short Duration funds are better suited to achieve a quick financial goal. 

If you are looking for a comparatively shorter investment horizon, these funds are the right fit for you. 

4. Suitable to Start The Systematic Transfer Plan(STP)

Similar to liquid funds, Ultra Short Duration funds can also be the source funds for the STP. 

STP is a SIP alternative. Instead of transferring money from a bank account to mutual funds, you transfer it from one mutual fund to another fund(s). You can invest a lumpsum amount and start STP into equity funds. 

Read more about Systematic Transfer Plan. 

Things to Consider Before Investing in Ultra Short Duration Funds

1. Investment Horizon

These funds are suitable for investors looking to park their money for 3-6 months. These funds can sometimes be slightly more volatile than liquid funds. Holding them for at least 3 months will lower the risk and generate better returns.

2. Risk and Returns

Interest rates impact each debt fund in a different way, primarily based on the investment tenure. Ultra Short Duration funds are less risky than short to medium-duration funds but riskier than liquid funds.

Fund managers may introduce underlying assets with lower credit quality but the potential to deliver superior returns. In such a case, your portfolio may come across credit risk. 

Don’t forget to check the fund’s past performance, rolling returns, and overall ratings before investing. 

3. Financial Goals and Current Portfolio

Investors should evaluate their portfolios before investing in any mutual funds. Though these funds are Short Duration, you may want to check if they align with your goals. The risk and returns in debt funds are different compared to equity funds. 

Ultra Short Duration funds can be a good addition to your portfolio to balance the risk without a long lock-in period.

These funds are suitable for any of your short-term goals. Be it buying a card in the next few months or planning a wedding. You can invest a lumpsum amount and earn returns. 

Taxation on Ultra Short Duration Funds

As per the tax rule applicable from 1st April 2023, the debt funds will not enjoy 20% tax with indexation. 

Now, both long-term and short-term gains will be taxed as per your income tax slab. 

Who Should Invest in Ultra Short Duration Funds?

Ultra Short Duration funds are for investors planning to invest for a few months. 

If you have a lumpsum amount to invest, equity funds may not be safe. And FDs, well… you may not earn superior returns.

Instead, invest your lump sum amount in these funds. You enjoy the benefit of high liquidity, safety, and better returns. Additionally, you can start STP to gradually distribute your investment among other mutual funds. 

Conclusion

Debt funds come into the picture when you want to earn returns without risking your money with market volatility. Instead of keeping the money idle in your bank account, transfer it into Ultra Short Duration funds.

The returns on these funds will contribute to the expense you have planned within 3-6 months. For example, a car or home down payment, or a vacation abroad. 

Debt funds are suitable for anyone, especially to balance the risk and returns. However, we’d recommend talking to a financial advisor to see which debt funds are suitable for your goals.

Advisors at VNN Wealth have a decade worth of experience in debt funds. Get in touch to plan your next investment.

Planning to buy a new phone? Going on vacation next month? Alright. Let’s discuss Liquid Funds.

Liquid funds are the best avenue to park your money for a week or a couple of months. An alternative to your bank account. These funds are suitable for investors looking for short-term investments and quick withdrawals.

Sounds convenient? Read along.

How Do Liquid Funds Work?

As the name suggests, these funds are liquid in nature. Meaning, you can withdraw as quickly as you invest.

Liquid funds are a collection of bonds, RBI treasury bills, and commercial papers that mature within 91 days. However, investors are free to withdraw the funds in a week with zero exit load.

You can also withdraw these funds in a day. But by holding them for 7 days, you become eligible for the zero exit load.

These funds are not only safe to invest in but also deliver better returns than your saving account.

Please note-> Even though the maturity period is short, you can choose to hold these funds for a longer duration. The ultimate goal is to have a flexible and quick withdrawal process. 

Top 4 Advantages of Liquid Funds

1. Short Investment Tenure

As these funds have a short average maturity, you can park your money for a couple of weeks to months.

FD, PPF, Equity Funds, and Long-Term Debt funds can encourage your long-term wealth goals. Liquid funds can fulfill your short-term goals like buying a phone or planning a trip. 

2. Low Risk

The underlying assets in these funds are of high credit quality (RBI T-Bills). Fund houses invest in assets with AAA credit quality. The chances of credit risks are scarce. 

These funds have very little to do with market volatility. And as these funds mature quickly, interest rate changes also have a low effect on the returns.

3. Decent Returns

Liquid funds prioritize security and liquidity. The returns may not be as high as equity funds or other debt funds in an ideal scenario. 

But you for sure will earn better returns than the saving account. Shift a certain amount in liquid funds instead of keeping it all in a bank account. 

4. Suitable for Systematic Transfer Plan

The systematic Transfer Plan (STP) is a SIP alternative with an option to invest a lumpsum amount. 

You can invest a lumpsum amount in a source mutual fund and transfer it in installments into target mutual fund(s).

These funds are perfect as a source mutual fund of STP. As the liquidity is high and the exit load is zero, setting up an STP becomes convenient. 

Read more about Systematic Transfer Plan. 

Things to Consider Before Investing in Liquid Funds

1. Returns on Investment

Liquid funds deliver decent returns compared to your savings account. If you are expecting much higher returns, then you may want to explore other debt funds or equity funds. 

The primary reasons to invest in these funds are security and quick redemption. Returns may not touch the sky but you will earn a decent profit.

2. Financial Goals

You may already have investments in place for certain goals in life. Retirement funds, education funds, family wealth goals, etc.

Similarly, you can invest a certain amount for short-term goals like buying a new bike or a laptop. These funds help you earn some extra money for the things you want to purchase in the near future. 

3. Risk

Every mutual fund will carry some sort of risk. Though liquid mutual funds offer security, both credit and interest rate risk are not completely absent.

The good thing is, most funds allocate the majority of the assets to high-credit quality assets. And as for the interest rate risk, that’s temporary. You will still earn decent returns. 

While you can surely invest in these funds for up to 91 days, we recommend taking advice from financial advisors. Reach out to us to know more.

Taxation on Liquid Funds

As per the new 2023 tax rule on debt funds, investors no longer have the benefit of indexation on Long-Term Capital Gains.

Now both long and short-term capital gains on debt funds will be taxed as per your income tax slab. 

Who Should Invest in Liquid Funds?

Liquid funds are particularly suitable for investors looking for short-term investments. You can park your money in these funds to earn superior returns than a saving account. 

Investors planning to start Systematic Investment Plan should definitely go with liquid funds to invest a lumpsum amount.

Conclusion

So, next time you buy a gadget or shortlist vacation spots, think about liquid funds as your companion. It’s the most convenient way to earn extra returns without any lock-in period or exit load.

These funds often deliver superior returns compared to interest on savings accounts, are secure and offer quick withdrawal. And as mentioned above, these funds are best to start an STP. 

To know more about debt funds and plan your investment, give our advisors a call. With a complimentary portfolio analysis, let’s align your investments with your financial goals. 

Multi Asset Funds aka Asset Allocation Funds are a combination of more than one asset class. These hybrid funds distribute your assets among equity, bonds, and gold. 

Investing money in multi asset funds gives you a readymade portfolio with multiple investment avenues. The combination of equity, debt, and gold is more popular in India. However, you might come across funds exploring international stocks or real estate. 

These funds are the perfect gateway to achieving a diverse and balanced portfolio. Let’s shed more light on multi asset funds.

How Multi Asset Funds Work?

Once you invest in these funds (either via SIP or lumpsum), fund houses distribute your money among different instruments. As said earlier, the most common investment avenues in these funds are equity, debt (bonds), and gold.  With their expertise and strategy, fund managers allocate the funds among these asset classes.  

As per SEBI guidelines, fund houses must invest at least 10% of the total invested amount in each asset class. Though these funds are often equity-heavy. Meaning, you will come across multi asset funds that invest 65% in equity and the remaining in debt and gold. 

The ultimate goal is to diversify the portfolio by balancing the risk and returns. 

Top 4 Advantages of Multi Asset Funds

1. Multiple Asset Classes

The performance of each asset class varies with economic changes. Equity performance depends on the market performance amid economic, political, and geological changes. 

Debt funds or bonds perform differently with the interest rate cycle. While short-term bonds perform well with rising interest rates, long-term bonds are good for falling interest rate scenarios.

Gold is for rainy days. It helps maintain a negative correlation to other asset classes during economic slowdowns or currency devaluation caused by inflation. 

As an investor, it is difficult to keep track of all these things. Instead, you can invest in multi asset funds once and benefit from various investment avenues. 

2. Portfolio Rebalancing and Diversification

Diverse investment is the key to a balanced and sustainable portfolio. The market keeps changing and your investments should balance the returns and risk. How does your portfolio look right now? Take a complimentary portfolio analysis with us. You’ll have a detailed understanding of where your portfolio needs rebalancing.

Equity-heavy portfolios should be balanced with debt funds, gold ETFs, and other money market instruments. Asset Allocation is easy with multi asset funds. You invest in a single fund that takes care of the distribution for you.

3. Readymade Portfolio

These funds are suitable for beginners or fairly new investors looking to create a portfolio. Instead of manually investing in various asset classes, you can begin with multi asset funds. It’s an easy start. You can surely explore investment avenues other than these funds later on. 

4. Less Volatile Compared to Pure Equity Funds

Debt and Gold allocation balance the equity exposure in multi asset funds. These funds are comparatively less volatile than pure equity funds. First-time investors can start their investment journey with these funds. 

Things to Consider Before Investing In Multi Asset Funds

1. Exposure to Asset Classes

As per SEBI guidelines, multi asset funds should at least have three asset classes each with a 10% allocation. As 10% is a bare minimum threshold, fund managers may or may not balance the funds. There is a possibility of a fund having more exposure to only one asset class. It is crucial to read the scheme carefully to understand the exposure to the asset classes. 

2. Individual Portfolio Diversification

Multi asset funds can be one of the ways to amplify diversification in your portfolio. But it shouldn’t be the only way. Each investor has a different risk appetite and wealth goals. A single scheme will not entirely align with your goals.

Apart from multi asset funds, explore other equity and debt mutual fund schemes. Talk to our advisors to plan long-term financial goals. 

3. Fund Managers

Fund managers’ experience and strategy play an important role in these funds. They analyze the market before distributing assets to achieve superior returns. Please note that there’s no single asset allocation strategy with these funds. It all depends on what the fund manager thinks will work. 

We’d recommend checking the fund manager’s performance, the fund’s rolling returns, and overall scheme documentation before making a purchase. 

Tax Implications

The taxation on capital gains usually depends upon the duration. Short-term gains and long-term gains have different tax rules for both equity and debt funds. 

However, if the equity exposure is at least 65%, you will benefit from equity taxation rules. Short-term capital gains are taxed at 20%. Whereas, you will have to pay only 12.5% tax on long-term gains above 1.25 lakhs. 

Note- Fund houses include the taxation details in the scheme documentation and also on their website. Don’t forget to understand taxation before investing. 

Who Should Invest in Multi Asset Funds

Multi asset funds are for everyone. The primary benefit of these funds is to balance your portfolio in any way possible. You get three asset classes in a single fund. And you get to enjoy equity taxation benefits when the exposure to equity is 65% or more. 

Please note that- with more exposure to equity, the risk factor is high. Consider investing for a longer duration to earn superior returns despite the market risks. 

Conclusion

Multi asset funds are popular among investors because of their diverse nature. It saves a lot of time by providing multiple assets under a single investment. These funds can be your gateway into a balanced portfolio. However, every investor has a different risk appetite and these funds do not offer personalized portfolios.

Advisors at VNN Wealth can help you understand how these funds stand on YOUR portfolio. Reach out to us to plan your next investment.