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. 

As the name suggests, Short Duration Funds are debt funds with a short-term maturity period. These funds primarily invest in debt or money market securities with 1-3 years of the investment horizon.

Fund houses allocate the majority of your assets into short-term instruments and the remaining into long-term instruments to balance returns and risk.

These funds have lower interest rate risk and varying credit risk depending on the scheme’s credit rating.

Here’s everything you need to know about these funds.

How Do Short Duration Funds Work?

Short-duration funds invest the majority of the assets in debt and money market securities with 1 to 3 years of Macaulay duration. 

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.  Confused? 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.

Usually, fund houses create the investment regime to generate income via the accrual of bond yield over the investment tenure.  

You will get both the interest earned and the principal amount by the end of the fund’s tenure. This eliminates the price volatility of the underlying instruments.

For example,

Let’s say the face value of the bond is INR 500 with a 7% annual coupon rate and 3 years maturity period.

Each year, you will get a 7% coupon rate on your principal amount. 

The bond price may change with interest rate movements. But, it will have no impact on your investment if you hold it till maturity. 

Top 3 Advantages of Investing in Short Duration Funds

1. Stable Returns Over The Investment Tenure

Fund managers prefer to hold bonds or money market instruments under the scheme till maturity. By doing so, fund houses accrue the coupons or the interest income that an investor is entitled to receive. 

Debt funds are safer compared to equity funds and the returns are predictable. You can expect stable returns on debt funds. 

We recommend you match your investment tenure with the fund duration to avoid interest rate risk. Staying invested for at least 3 years enables the tax benefit for you. You will only have to pay a 20% tax on the long-term capital gain post-indexation benefit. 

2. Lower Risk

Debt funds have two types of risks- Interest rate risk and Credit risk.

Bond prices are inversely proportional to the interest rate. When the interest rate rises, bond prices go down, and vice versa.

To avoid interest rate risk, you can invest in funds based on the interest rate cycle. Short-duration funds perform well in rising interest rates. They can quickly mature and adapt to the new interest rate. During falling interest rates, long-duration funds perform better. The NAV of the funds goes up with each fall in the interest rate. 

Choosing higher credit rating funds can avoid credit risk. Only invest in funds that have AAA or AA ratings. The risk factor increases as you go down on the credit rating chart.

3. Diverse Portfolio

Short duration funds are best suited for portfolio diversification. These funds invest in various fixed-income securities for a shorter duration.

If you are not ready to lock your investment for a longer duration, these funds are for you.

Things To Consider Before Investing in Short Duration Funds

1. Investment Horizon

Make sure you are certain about the investment horizon that you are looking for. Between 1 to 3 years, you can invest in funds that align with your portfolio.

3-year tenure is not much, so we would recommend keeping at least 3 years of investment horizon while choosing a fund. 

2. Yield to Maturity vs Coupon Rate

The scheme will have a predefined annual coupon rate which remains the same throughout the tenure. 

But, the interest rate keeps changing all the time. Yield to maturity is the annual rate of interest that you will earn from the funds. It could be higher or lower than the coupon rate. 

3. Risk Tolerance

Even though short Duration funds are less riskier, you must analyze the risk tolerance of your portfolio.

Seek guidance from VNN Wealth advisors on how much risk your portfolio can manage. Choose your investments accordingly.

4. Track Record of The Fund and Fund Manager

We would recommend taking a moment to study the performance of the funds.

Though historical data is not the only way to judge a fund as anything can happen with the changing economy. But better to be aware of it.

Fund managers’ strategies and calculations are crucial for the fund’s performance. Check the track record of the fund house/manager along with the scheme itself before investing.

5. Expense Ratio

Fund houses charge you a small fee to handle your investments and to deliver desired outcomes. The fee is called the expense ratio which won’t be much for passive funds but could be higher for active funds.

Compare the expense ratio of various funds in a similar category to stay informed.

Note- Higher expense ratio is not always bad. Sometimes, funds with a higher expense ratio may deliver equally superior returns.

Tax Implications

Taxation on Debt funds has been revised since April 2023.

Now, both Short-term capital gains and Long-Term Capital Gains will be taxed as per the tax slab. 

The indexation benefit on Long-Term Capital Gains is only applicable to hybrid funds with more than 35% exposure to equity funds. 

Read more about mutual fund taxation.

Who Should Invest in Short Duration Funds?

Short-term funds are primarily suited for investors looking for a fixed income. These funds will generate stable returns with low to moderate risks in a short duration.

Investors who are looking for investments shorter than 5 years can go with these funds. You can get the indexation benefit after 3 years of investment tenure.

Conclusion

Short-term debt funds are a great way to generate income without a longer investment horizon. You can choose funds between 1 to 3 years of maturity at your convenience.

You may come across a moderate risk due to interest rate movements. But you can avoid it by holding your investment until maturity.

If you are looking for an option to balance equity funds risk, debt funds can help you. Debt funds have become as famous as FDs because of the lower risk and fixed coupon rates.
So if you are planning to invest in debt funds, don’t forget to explore various options. Get in touch with our advisors to see which funds can align with your portfolio. 

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Dynamic Bond Funds

Banking and PSU Funds

Credit Risk Funds

Credit risk funds are a type of debt fund that invest the majority of the assets in low-credit quality debt instruments.

Wondering why? 

Debt securities with low-rating may carry a higher risk. But these funds may also generate a superior yield than safer debt funds. 

Fund managers often invest in securities that they think have the potential of getting a credit boost. In the long run, these funds could bring higher returns than your expectations.

Interested to explore? Let’s find out more about Credit risk funds.

How Do Credit Risk Funds Work?

Debt funds come across two primary risks: Credit risk and Interest rate risk.

Credit risk is when the issuer may fail to repay your principal investment and returns. To avoid it, underlying bonds are given a rating based on factors such as: credit quality and the financial performance of a company.

Bonds below the rating AA are considered low-rating, high-risk bonds. 

Safe investors often avoid such bonds to eliminate credit risk.

However, low-rated bonds are not always bad. These bonds have the potential to outperform and boost their credit ratings.

In credit risk funds, fund managers allocate at least 65% of total assets into securities with AA or lower ratings.

Though there is a risk, there is also a possibility of better returns.

These bonds may get a credit boost based on their performance, which also amplifies the NAV. In a longer investment horizon, you may end up getting a higher yield.

Top 3 Advantages of Investing In Credit Risk Funds

1. Potential Of Superior Returns

These funds tend to deliver superior returns because of the risk involved. Investors looking to generate income among debt securities can consider these funds. 

2. Portfolio Diversification

Credit risk funds are a great way to diversify your portfolio. Swadanusar risk on your profile brings higher returns. Explore these funds if your portfolio has some space to take moderate risk.

3. Professional Management

These funds are not easy to manage on your own. Fund managers utilize their expertise to select the right debt funds to invest in. The underlying bonds may crawl up to the higher credit rating, rewarding you with more yield. 

Things To Consider Before Investing In

1. Investment Goals

Do these funds fit in your investment goals for the next few years? 

Don’t forget to recall your investment goals before you invest in any funds. If it fits, you have got yourself a nice opportunity to earn decent returns. 

2. Risk Tolerance

These funds are riskier than other bond funds. Invest only if your portfolio has some space for inviting moderate risk.

Get a complimentary portfolio analysis with us to find out your risk tolerance before you invest.

3. Investment Horizon

Most funds perform better in a longer duration. 

Credit risk funds tend to be highly volatile in the short term. Make sure you are fine with a longer investment horizon to avoid any losses. 

4. Expense Ratio

The expense ratio is a fee that fund houses will charge you for managing your investments. It can be higher for actively managed funds.

Don’t forget to compare the fees and expenses of funds before investing. Often, investors prefer to pay a slightly higher fee if the fund has the potential to deliver higher returns. 

5. Professional Advice

Credit risk funds could be tricky for new investors. If you are still willing to explore them, get professional advice to avoid confusion and possible losses. 

Here are a few things to look for in a financial advisor.

Tax Implications

Taxation on credit risk funds is similar to all other debt funds.

• Tax on Short Term Capital Gains (investment held for < 3 years) = Same as your tax slab.
• Tax on Long Term Capital Gains (investment held for > 3 years) = 20% with indexation benefits.

Who Should Invest In Credit Risk Funds?

Credit risk funds can be volatile and carry high risk. There is a chance of credit rating further degrading instead of boosting. 

These funds are not suitable for investors with low-risk appetites. 

Invest only if your risk profile and investment goals align with these funds. 

Conclusion

Credit risk funds can be a great addition to your portfolio to generate additional returns. Though you will come across a certain risk in the short-term horizon.

These funds are only suitable for investors with a high-risk appetite. We would recommend holding your investment for a longer duration to minimize volatility and losses.

If you are still confused, feel free to reach out to our advisors to plan your investments. 

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Dynamic Bond Funds

Banking and PSU Funds

Banking and PSU funds are open-ended debt funds. 

According to SEBI guidelines, these funds invest at least 80% of the corpus in debt and money market instruments that banks or public sector undertakings issue.

Among all the other debt fund categories, Banking and PSU funds are known to have superior credit quality. 

Investors wanting to explore debt funds with decent returns and lower credit risk can consider these funds.

But before you invest, here are some facts about these funds.

Top 3 Advantages of Investing in Banking and PSU Funds

1. Low Credit Risk

One of the biggest perks of investing in these funds is minimal credit risk. These funds strictly invest in Maharatna and Navaratna companies with AAA ratings on underlying instruments.

These companies have years of performance history and deliver consistent returns.

2. Risk

As mentioned above, these funds have underlying assets having AAA ratings. Investors do not have to worry about credit risk as most instruments are government-backed.

And as far as the interest rate risk is concerned, it’s just a temporary phase. The interest rate can fluctuate the NAV of the debt fund. But the loss you may face during the rising interest rate cycle can be recovered during the falling interest rate cycle. Make sure you hold your investment for a longer duration to surpass the interest rate cycles. 

3. High Liquidity

Banking and PSU funds are often in demand among investors. Due to stable returns and safer investments, many are interested in buying these funds.

It enables higher liquidity for these funds. You can sell them off in case of emergencies.

Things To Consider Before Investing In Banking And PSU Funds

1. Returns on Investment

Debt funds may or may not deliver as much return as equity funds. But they generate superior returns than FD or savings accounts. 

Banking and PSU funds ensure higher security but may not deliver higher returns.

Our advisors would recommend holding your investment for more than 3 to 5 years to earn decent returns.

2. Investment Portfolio

Banking and PSU funds would be a great addition to your portfolio to balance the risk. 

If your portfolio is more inclined towards equity, debt funds can safeguard you from volatility. While equity funds deliver superior returns, Banking and PSU funds offer security. 

3. Investment Tenure

Banking and PSU funds have underlying assets with 1-2 years of tenure. Investors who want to invest in a fund with short-term underlying assets and lower risk can invest in these funds.

Though, irrespective of the tenure of the papers held under these funds, you can hold the investment for a longer duration. Align the investment horizon with your financial goals. In fact, holding your investment for more than 3 years makes you entitled to tax benefits with indexation. 

4. Expense Ratio

The expense ratio is the fee the fund house will charge you for managing your funds.

There is often a misconception that- a lower fee will leave you with higher returns. In reality, it doesn’t work like that.

Often, fund houses may charge a slightly higher fee but will deliver superior returns than other funds in the same category.

While investing in any mutual funds, don’t forget to compare the expense ratio. 

Tax Implications

Tax implications on debt funds have changed since April 2023.

Similar to all pure debt funds, investors have to pay tax on both short and long-term capital gains as per their tax slab. 

The indexation benefit on LTCG will only be applicable to hybrid debt funds with more than 35% exposure to equity.

Who Should Invest In Banking and PSU Funds?

Banking and PSU funds are suitable for investors looking for low-risk short-term investments. These funds are safer than Dynamic Bond Funds or Credit Risk funds.

These funds are also suitable for investors who are not fond of FD but would like similar security. Though these funds could be slightly riskier than FD, they may deliver superior returns too.

Conclusion

All the underlying assets in Banking and PSU funds are government-backed. These funds are also less volatile than equity funds, enabling maximum security. 

You can explore various state-owned companies from various sectors via these funds to diversify your portfolio.

Investors looking for decent returns along with lower risk can go with Banking and PSU funds.

Get a complimentary portfolio analysis with VNN Wealth to see if these funds are suitable for your portfolio. 

Also Read

Types of Debt Funds

Dynamic Bond Funds

Dynamic Bond Funds are a type of debt mutual fund with a flexible average maturity period. These funds switch between long-term and short-term instruments depending on interest rate fluctuations.

DBF takes advantage of interest rate changes by dynamically altering the allocation to gain optimal returns.

Interested? Read along for more information.

How Do Dynamic Bond Funds Work?

Let’s get into some basics before exploring the DBFs.

Debt funds are a combination of various bonds, commercial papers, T Bills, etc. Each of these instruments has a different maturity period. Combined, the debt funds get the average maturity period of all these bonds.

Whenever interest rates fall, bond prices go up and vice versa. In a falling interest rate scenario, long-term funds perform better. Short-term funds tend to deliver superior returns in a rising interest rate scenario.

Dynamic Bond Funds are designed to deliver superior returns in any interest rate scenario. These funds do not have predefined maturity. 

If the fund managers think the interest rates are falling and may fall further, they will switch the allocation to long-term bonds. Otherwise, they will switch the allocation to short-term bonds. 

In both rising and falling interest rate scenarios, you get optimal returns. 

Top 3 Benefits of Dynamic Bond Funds

1. No Debt Fund Mandate

Most debt funds have to follow an investment mandate. For example, short-term debt funds can only have short-term instruments as a base investment. Long-term debt funds only allocate assets among long-term instruments.

Dynamic Bond Funds do not have any restrictions. Fund managers can dynamically allocate assets among instruments with varying maturity periods.

2. Optimal Returns

Bond prices are inversely proportional to interest rates. There’s always a risk of losing profit when interest rates fluctuate.

Fortunately, Dynamic Bond Funds can shift allocations between different instruments to generate optimal returns.

3. Expert Fund Management

Investors do not have to worry about interest rate scenarios as fund managers take care of everything. Fund managers make the calculated decisions to switch the underlying instruments to deliver superior returns.

Things To Consider Before Investing In Dynamic Bond Funds

1. Fund Manager

As mentioned above, fund managers are responsible for dynamically altering the underlying assets. 

Fund managers’ calculations and expertise are extremely important here. In any interest rate situation, the fund manager’s judgments are ultimately going to decide how much return you earn.

This brings us to the next point.

2. Risk

Returns on Dynamic Bond Funds are comparatively less affected by interest rates. By shifting the portfolio, fund managers can balance the risk to optimize the returns.

However, interest rates don’t always work in your favor. If the fund manager’s strategy fails to align with an interest rate, you may lose profit.

3. Economical and Political Matters

Changes in government policies, prices of oil and gas, and political matters can affect returns on dynamic bond funds. The returns might boost or fall, it could go either way.

It’s always better to be aware of such factors to plan your investment. Economical and Political matters often alter in the short term. You may save the loss by investing for a longer horizon. 

4. Fund’s Track Record

It is advisable to examine the track record of the fund before investing in it. Be it equity or debt funds, check the fund performance across various interest rate cycles.  

For dynamic bond funds, don’t invest via NFO. Instead, invest in funds that have a longer performance history to glance at.

Tax Implications

Post April 2023, tax rules on debt funds have been changed. 

Both Long and Short term capital gains will be taxed as per the investor’s tax slab.

Long-term capital gains are applicable when you redeem your investment after 36 months. Otherwise, short-term capital gains will be applicable. 

Who Should Invest In Dynamic Bond Funds?

Returns on Dynamic Bond Funds rely on ups/downs in interest rates. If you understand the interest rate movements, you can create your own portfolio of bonds. Otherwise, we would recommend investing in existing and well-performing funds.

DBF can be suitable for investors with moderate risk appetite. Beginners can consider DBF at a slightly later stage when the portfolio is stable. We would recommend an investment horizon of 3-5 years or more to gain superior returns. 

Conclusion

Dynamic Bond Funds are one of the riskier debt fund schemes. Its performance depends greatly on the fund manager’s calculations and interest rate movements.

However, these funds can also deliver superior returns. 

Dynamic Bond Funds are not suitable for everyone. But if you are curious about it, reach out to VNN Wealth. Our advisors will help you understand the fund alignment in the interest rate cycle. 

Explore more funds and diversify your portfolio with us.

Also Read:

Types of Debt Funds

FD vs Debt Funds

Mutual Funds

Gilt funds are debt mutual funds primarily investing in securities issued by a state or central government. 
When the government of India is seeking a loan or funding, they approach the RBI. Reserve Bank Of India lends money to the government by borrowing it from banks or different financial entities.
Fund managers can subscribe to these issued fundings. That’s how the Gilt funds in India work. Fund houses allocate investors’ money into government-issued bonds and securities.
And as the government is involved, these funds are the safest to invest in.
Our team has gathered some tips for you before you make an investment. Read along.

What is the Investment Regime?

Gilt funds have two types of investment options-

1. Varying Maturity- In this type, fund houses allocate at least 80% of total funds to government security of varying maturity periods. You might come across a slightly higher interest-rate risk in these funds.

2. Ten-Year Constant Maturity- Here, fund managers allocate at least 80% of total assets to government securities with a constant duration of 10 years. The interest-rate risk is comparatively lower in these Gilt funds.

Top 3 Advantages of Investing in Gilt Funds 

1. Opportunity To Invest In Government Securities

Individual investors cannot easily invest in government securities. By investing in these funds, you can invest in both state and central government securities.
This will add another diverse investment to your portfolio.

2. No Default or Credit Risk 

Both the government and the RBI will guarantee your repayments. Gilt funds do not have any default risk, which enables low-risk investment.

3. Decent Returns

Gilt funds may deliver superior returns depending on the interest rate. During a falling interest rate scenario, these funds deliver better returns than bank deposits over a longer duration. 

Things to Consider Before Investing in Gilt Funds

1. Investment Horizon

We would always advise keeping an investment horizon of 3 to even 10 years.
Though there is no lock-in period in Gilt funds, you may receive better returns over a long duration. 

2. Risk Factor

Even though these funds have zero default or credit risk, you must consider interest rate risk. 
Know that the NAV of the single unit of Gilt funds may drop during increasing interest rates. Instead of selling, you can use this opportunity to buy more units. 

3. Financial Goals

Two important things that should align with your financial goals are- (A) The maturity period, and (B) The interest rate.
As mentioned above, the rise/fall in interest rate may cause the NAV to fall/rise too. You can avoid high interest-rate risk by understanding the interest rate cycle. 
You can reach out to our advisors to know when is the right time for you to invest. 

4. Expense Ratio

Similar to any other mutual fund, you will have to pay an expense ratio for Gilt funds too. It’s a small fee that fund houses charge to manage your investments.
As per SEBI guidelines, fund houses can only charge up to 2.25% of total assets in the form of a fee.

Please Note That- Low expense ratio is not always good. You can certainly consider paying a slightly higher expense ratio if the returns are worth it. You sure can maximize your gains if the expense ratio is low. But what if the gains themselves are low? 

Taxation On Gilt Funds

You will have to pay tax on short-term capital gains (STCG) and long-term capital gains (LTCG) on Gilt funds. 
After the new tax ruled from April 2023, 

Tax on both STCG (investment held for less than 3 years) and LTCG (investment held for more than 3 years) will be considered as per your tax slab.

The indexation benefit is no longer applicable for pure debt funds. Only hybrid funds with more than 35% equity exposure can benefit from indexation. 

Who Should Invest in Gilt Funds?

Investors who are interested in exploring government securities and wouldn’t mind a longer investment horizon can invest in these funds.
In our experience, if bought at the right time, Gilt funds can compete with equity funds in terms of returns; especially during falling interest rates.

Conclusion

Debt funds have become a popular investment option in the past few years. Investors are willing to explore diverse debt instruments to balance the risk and returns.  
Gilt funds are one of the safest debt funds as there is no default or credit risk. Investors interested in Government bonds and securities should absolutely consider investing. 
Keep in mind that, you may come across interest rate risk. To balance that, hold your investment for a longer duration, at least 3-5+ years.
To know more about Gilt funds and investment options, reach out to us anytime. Advisors at VNN Wealth can help you choose the gilt fund suitable for your portfolio. Evaluate your profile and plan your next investment with us.

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What are Floating Rate Debt Funds?

Exchange Traded Funds

Explore More Mutual Funds

Floating rate debt funds aka floater funds are open-ended debt funds. These funds invest in debt instruments with varying(floating) interest rates.

The interest rates of underlying debt instruments rise as the RBI repo rate goes up. Hence, floater funds tend to perform better during rising interest rates compared to other Debt funds. 

In a rising interest rate regime like the one we are going through currently, investors have a good possibility of earning superior returns compared to fixed interest rate instruments.

As the interest rates are locked in the latter and can’t be readjusted to the new increased rate which makes floating rate debt funds one of the best asset classes to hold in a rising interest rate scenario.

Investment Regime of Floating Rate Debt Funds

As per SEBI guidelines, fund houses invest at least 65% of the total corpus into floating-rate debt instruments. 

There are two types of floater funds:

Short-Term Floater Funds-

Short-term funds invest primarily in debt instruments with short maturity periods and higher liquidity. For example- Government securities and T-bills.

Long-Term Floater Funds-

Long-term floater funds invest in debt instruments with longer maturity horizons such as corporate bonds and government bonds.

Top 3 Advantages of Floating Rate Debt Funds

1. Returns

Floater funds deliver superior returns compared to other debt funds or fixed-income instruments. Investors can expect to earn more profits from floater funds during rising interest rates. 

2. Open-Ended Funds with Higher Liquidity

Investors can invest in floater funds anytime, with a flexible horizon. You can select a short or long-term horizon depending on your investment goals. And you can invest/sell these funds whenever you want.

3. Diverse Portfolio 

Floating rate debt funds invest at least 65% of the total corpus into various debt instruments. Fund houses might invest the remaining funds in fixed-income instruments.  

You have the opportunity to invest in Government & corporate bonds, T-bills, and loans. With a blend of varying and fixed-income rates, you can achieve a diverse portfolio.

4. Low Risk 

Most debt funds carry credit risk and interest rate risk. But floater funds are less riskier as they carry very little to no interest rate risk. 

Interest rates of the underlying bonds in floater funds often align with the market interest rate. So the risk associated with interest rates is quite low compared to other debt funds. 

While there is a slight possibility of credit/default risk, it can be avoided by choosing the right funds. Only invest in funds with higher ratings (above AA). This rule is applicable to all types of debt funds so you won’t have to face default risk.

Things to Consider Before Investing In Floater Funds

1. Investment Horizon

Consider holding your investment for more than 3 years. You have a chance to earn better returns and tax benefits.  

But, you can also explore short-term funds which may deliver superior returns to fulfill your envisioned investment goals. 

Carefully choose the investment tenure that aligns with your portfolio. 

2. Investment Timing 

Floater funds perform better during the rising interest rate scenario. You may earn exponential gains when interest rates are rising. 

But keep in mind that the RBI repo rate directly affects the interest rate. Don’t consider investing in these funds when the interest rates are falling or may fall.

3. Your Investment Portfolio

Floating rate funds may lower the overall risk on your portfolio. If you invest in funds with good ratings, you won’t come across default risk. 

These funds could be a good addition to managing the risk and also include various debt instruments to your profile.

4. Expense Ratio

Fund houses will charge a certain amount of fee aka expense ratio to manage your funds. Evaluate the expense ratio with respect to possible capital gains before investing. 

Please know that a lower expense ratio doesn’t necessarily mean higher capital gains. In some cases, you might earn even higher returns through a fund that charges a slightly high expense ratio. 

You may also want to consider comparing the expense ratio of funds from similar categories and tenure.

Taxation in Floating Rate Debt Funds

Investors have to pay tax on both Short and long-term capital gains from floater funds.  

• For short-term capital gains (investment horizon < 3 years), investors have to pay tax as per their tax slab. 
• Long-term capital gains (investment horizon > 3 years) come under 20% taxation with indexation benefit.

Who Should Invest In Floater Debt Funds? 

Investors who are looking for competitive returns with lower risk can consider investing in these funds. Floater funds may deliver better returns for the same maturity period than other low-risk investment options. 

If you are aiming to diversify your portfolio but don’t want to go with fixed-rate debt funds, then these funds can be for you. 

We highly recommend considering all the above points before you invest in floater funds or any other mutual funds.

Or you can get in touch with our advisors for more details.

Conclusion

Floating-rate debt funds have flexible maturity periods. These funds can boost your overall investment portfolio during rising interest rates. 

However, keep in mind that repo rate fluctuations have a direct impact on these funds. You might come across interest rate risk when the repo rate goes down.

Invest in funds with higher ratings and only during rising interest rates. 

If you are interested in debt securities, you can give us a call or send us an email. Advisors at VNN Wealth have been analyzing debt funds for a while now. 

Review your portfolio and risk profile with us and make a solid investment plan.

You may also like to read about different types of mutual funds. 

Learn some easy personal finance tips here. 

Debt funds are mutual funds schemes that allocate your assets to debt instruments such as government bonds, corporate bonds, commercial papers, and T-bills.

These debt instruments are traded in the market like stocks. Their price goes up and down based on the interest rates and demand. 

In recent years, debt funds are gaining popularity among investors as they offer decent returns with lower risk than equity schemes. 

Debt funds come in various types depending on the investment horizon and risk factor. 

Let’s see how many different types of debt funds are there

Common Types of Debt Funds

Debt funds have three primary categories based on credit profile, duration, and underlying assets.

Type 1: Duration Profile

These debt funds primarily focus on the maturity duration of the underlying investment. 

1. Overnight Funds

Overnight funds invest in debt instruments with a maturity of 1 day. This bond offers high liquidity with moderate returns. Overnight funds are suitable for investors willing to invest in debt schemes for a very short period of time.

2. Liquid Funds

Liquid fund schemes invest in debt securities with only up to 91 days of maturity period. These funds are suitable for investors seeking steady returns by investing only for a few months. 

3. Ultra-Short Duration Funds

Ultra-Short duration funds have a 3-month maturity period. These funds may offer superior yield (rate of return) with low risk when held for more than 3 months. 

4. Low Duration Debt Funds

Low Duration debt funds expect investors to have an investment horizon of at least 6-12 months. These funds may deliver higher returns than ultra-short duration funds but with moderate risk. To boost the yield, these funds may allocate some assets to bonds with lower credit rank.

5. Money Market Funds

Money market funds allocate your assets to debt instruments having a maturity period of upto 1 year like commercial papers or treasury bills. The interest income may boost returns on these funds.

6. Short Duration Funds

Short-duration funds expect you to have 1-3 years of an investment horizon. These schemes invest in both short and long-term debt instruments with different credit ratings. You may receive higher returns than liquid or ultra-short funds but with some fluctuations in the prices. Investors with a slight risk appetite can consider these funds.

7. Medium Duration

These funds invest in debt and money market instruments with a maturity period of 3-4 years.

8. Medium to Long Duration

These funds have a maturity horizon of 4-7 years. You may come across high-interest rate risk but with decent returns.

9. Long Duration

These funds have a 7+ years maturity period. Long-duration schemes might be riskier than any of the above schemes, yet less risky than equity schemes. 

    10. Dynamic Funds

Dynamic funds have no threshold or restrictions on the security type or maturity period of the investment. These schemes are flexible and dynamically change investments depending on the interest rate cycle. 

Type 2: Underlying Assets

These debt funds focus mainly on the specific investment profile of the underlying asset.

1. Corporate Bond Funds

These schemes invest at least 80% of total assets in AA+ or higher corporate bonds. Investors with a low-risk appetite seeking regular income and safety can consider investing in corporate bond funds.

2. Floater Funds

Floater funds invest at least 65% of total assets in floating rate instruments. As the coupons (annual fixed income security) on the floating rate get periodically reset, you can take advantage of low interest-rate risk. 

3. Banking and PSU Funds

These funds invest at least 80% of total assets into debt securities issued by banks, PSUs, and public financial institutions. These funds offer safety, decent yield, and liquidity. 

Type 3: Credit Profile

These debt funds invest based on the underlying credit risk profile. 

1. Credit Risk Funds

Credit risk funds allocate at least 65% of total assets to AA (or lower) rated corporate bonds. There’s some risk but yields might be superior. If you have an aggressive risk profile and are looking for high risk-high return, these funds are suitable for your portfolio.

2. Gilt Funds

Gilt funds invest at least 80% of total funds in government securities of varying maturity periods. You may come across a high-interest rate risk but a low default risk. In a falling interest rate scenario, Gilt funds may be an ideal investment option.

On the other hand, Gilt funds with a 10-year constant duration, unlike regular Gilt funds, invest at least 80% of total funds in government securities with a constant duration of 10 years. Here, interest rate risk is stable due to the constant duration. 

Conclusion

Among all the different types of debt funds, it could be confusing to choose one. It’s important to match the current yield to maturity, modified duration, and credit risk of the debt fund to your financial goals, risk profile, and investment horizon.

It’s best to get an expert to help you find which debt fund to invest in. Before letting a financial advisor evaluate your profile, here are some things you need to know.

 

Contact us to get a free portfolio analysis and know about all possible investment options suitable for you.

Index mutual funds are the type of passive funds that follow a certain index/benchmark to plan investments. The fund managers follow the index such as Nifty 50 or Sensex to invest money in the exact proportion. The returns on these funds are aligned with the underlying index. 

These funds are safer than equity mutual funds, have lower expense ratios, deliver decent returns, and don’t need active attention. Investors who are seeking diverse portfolios with low to moderate risk can take advantage of the index funds.  

Let’s shed more light on the index funds.  

What Is The Investment Regime For Index Mutual Funds? 

Index mutual funds in India either follow the Nifty 50 or Sensex as the investment benchmark. 

Nifty 50 is the benchmark index that represents the top 50 companies listed on the National Stock Exchange. Sensex represents the top 30 companies listed on the Bombay Stock Exchange. These companies could be of any type and sector.  

Fund houses allocate money to these top companies on Nifty or Sensex. The performance of the index funds completely depends on the performance of the underlying index. 

It is always advised to hold these funds for a longer horizon to receive superior returns.

Top 5 Advantages of Index Mutual Funds

1. Diverse Portfolio

Index funds are a combination of companies from various sectors. Once you invest in index funds, you invest in all these companies without assessing them individually. 

Not only does it save your time but also diversifies your investment portfolio. 

2. No Active Management 

Index funds are passive investments. Neither the fund manager nor you have to actively reallocate the funds to balance risk and returns. 

Fund managers simply follow the underlying index benchmark and keep the investment as it is.  No headache of active management.

3. Low Expense Ratio 

Fund houses do not need to invest time and resources into analyzing the performance of the fund. They only have to reflect the benchmark into the investment allocation. To do so, they charge a very minimal expense ratio. 

4. No Fund Allocation Bias 

How much funds to allocate to a particular stock is always a question with mutual funds. Fund managers have to analyze the market to decide the percentage of funds to allocate to each company. 

In index funds, the allocation bias doesn’t exist as the benchmark defines it all. There is less chance of human error as these funds are regulated with the index.

5. Risk Transparency 

The fluctuations in the returns from index funds depend on the performance of the top companies from the underlying index.  

Since Nifty and Sensex constantly track the performance of the companies, the risk can be lower. You have complete transparency about the risk factor.

5 Things To Consider Before Investing In Index Funds

1. Returns on Index Funds 

As index funds are passively managed funds, they are less affected by market volatility. You will be able to earn decent returns even when the market is not at its peak.  However, you may want to consider investing in some active funds to balance the returns. 

2. Risk

Index funds are less riskier than equity funds. Market volatility doesn’t actively impact index funds. You may still get good returns compared to other actively managed investments.

3. Tracking Error and Tracking Difference 

Tracking difference is the difference between the gains of the index funds vs the underlying index. If it’s positive, the funds have outperformed the underlying index. Tracking error is the standard deviation of the tracking difference over a period of time. Fund houses make decisions based on tracking errors with respect to the underlying index. It can have either a positive or a negative impact on the returns.

4. Investment Horizon 

Index funds deliver better returns in a long term. If you keep your investment horizon to 5-7 years, you are most likely to earn better returns. The rule applies to all mutual funds. 

5. Index Category 

You may want to make yourself familiar with the index category. Index funds either follow the Nifty 50 or Sensex with variable or equal weightage. You can choose the index fund category based on your risk tolerance and portfolio balance. 

Taxation In Index Funds

The capital gains earned via Index funds are similar to the equity mutual funds. It depends on the duration of the investment. 

If you redeem your investment before 12 months (Short term capital gains), you will have to pay a 20% tax. Investments held for more than a year (Long Term Capital Gains) above 1.25 Lakhs are taxed at 12.5%.

Who Should Invest in Index Funds?

Index funds are not as risky as equity funds or stocks. So any new investor can start an investment portfolio with index funds. These funds are suitable for low-risk appetite investors. 

However, index funds are also great to balance the risk. So if you have active funds which are prone to risk, index funds can balance your risk profile.  

Always good to have a blend of active and passive funds in your portfolio.

Conclusion

The top two advantages of index funds are: these funds are passively managed and possess comparatively lower risk. If you are looking for a long-term, risk-balancing investment, index funds can chime in on your portfolio.

You may want to get familiar with the index categories before choosing a suitable index fund. Or you can always seek help from our expert advisors. 

We recommend evaluating your portfolio before deciding on the right index fund for you. Write to us anytime with your investment goals. Get a complimentary portfolio analysis and start building wealth.

You may also like to read-

What are Exchange Traded Funds and how are they different from Index Funds?

FD vs Debt Funds: Where to invest your money?

The fixed deposit has been a popular investment option in Indian households for years. If you have a lumpsum amount, your grandparents and parents will suggest investing in FD.

Debt funds, on the other hand, started becoming popular in the past few years. Many investors began preferring debt funds over FD for several reasons. 

However, the recent changes in the debt funds taxation have thrown everyone off guard. From April 2023, investors will no longer benefit from indexation on Long-Term capital gains. Both Long and Short-term capital gains will be taxed as per the investor’s tax slab.

So…

Are debt funds still better than FD? The answer is YES!

Let’s find out how.

FD Vs Debt Funds

Fixed Deposit:

A fixed deposit is a financial instrument where you can invest a lumpsum amount and earn returns at fixed interest rates. Usually, banks have predefined interest rates and tenure.

Debt Fund:

Debt funds are a type of mutual fund in which fund houses allocate your assets into fixed-income securities such as government bonds, corporate bonds, commercial papers, and T-bills. 

Top 4 Differences Between Debt Funds and Fixed Deposit

1. Risk

Fixed Deposit:

FD is known to be the safest investment option. 

However, in rare cases, if a bank goes bankrupt, it might default on your FD. According to recent RBI rules, even nationalized banks only offer up to INR. 5 lakh of FD default insurance per account. You may not receive the principal amount or interest above INR. 5 Lakh if the bank defaults on your FD.

Debt Funds:

The risk on debt funds depends on the features of the scheme you invest in. There are 15 different types of debt funds, each with variable risk-reward intensity. 

Debt funds primarily come across two types of risks:

1. Interest Rate Risk– Similar to stocks, bonds are also traded in the market. Their price goes up and down based on the interest rate and demand. If the interest rate goes up, the price would decrease and vice versa. These fluctuations can either drop or boost the returns.

You can manage the interest rate risk by holding your investment until maturity or by buying short or long-duration funds based on whether the interest rates are going up or down. 

2. Credit Risk– Say, for instance, you loan INR. 1000 to your friend to start a business. The friend promises to return your money with interest. But if his/her business doesn’t do well, then your friend might not be able to honor the commitment. A similar thing can happen in debt funds. Borrowers might not be able to deliver expected commitments, which causes credit risk. You can avoid it by evaluating the ratings of bonds through credit rating agencies like CRISIL.

Different credit rating agencies may have different rating parameters. But the most common ratings are AAA, AA, A, BBB, BB, B, C, D, and SD.

AAA and AA are the safest to invest in. ‘A’ may have a slight risk associated with it. All the further ratings have moderate to high risk.

Other than credit risk funds, most debt funds maintain credit quality by investing in high-credit quality bonds. 

2. Returns

Fixed Deposits:

A fixed deposit delivers returns based on the fixed interest rate offered by the bank. You will be guaranteed to earn a fixed interest rate. But there’s no possibility of earning anything beyond that. 

At the time of maturity, if you decide to extend the FD, it will get reinvested at the current interest rate, which could be lower/higher than the previous one. 

Debt Funds:

Debt funds may not guarantee how much returns you’ll earn. But they can deliver superior returns than the FDs, especially in a falling interest rate scenario where bond prices shoot up, offering additional returns.  

3. Liquidity

Both FD and Debt Funds do not have any lock-in period. You can withdraw money whenever you please. However, banks charge a penalty for premature withdrawal.

Debt funds may or may not have an exit load. It’s the fee charged by fund houses if you redeem funds before a certain period of time. You can check the exit load associated with the debt fund before investing in it. 

Taxation on FD vs Debt Funds

Let’s address the elephant in the room. The TAX.

1. Tax on Accrued Interest on FD

You have to pay tax on accrued interest on FD every year even before you receive it. 

Let’s say, you have created a cumulative FD. The yearly interest that you earn will be reinvested in the same FD to benefit from the power of compounding.

Now, as unfair as it may sound, the reinvested interest will be treated as income earned. You have to pay tax as per your tax slab on the interest you technically haven’t received in your account.

2. Tax On Capital Gains Earned on Debt Funds

Unlike FDs, Debt funds do not have the concept of tax on accrued interest. You only have to pay tax on capital gains when you redeem your investment. 

Before April 2023, all Debt funds used to have different tax rules for Short and Long Term Capital Gains. Indexation benefit on LTCG was the key feature of debt funds taxation.

From April 2023, the taxation rule has changed.

As per the new rule:

Both Long and Short term capital gains will be taxed as per the investor’s tax slab without any indexation benefit. 

Unless…

The fund has more than 35% exposure to equity.

Explore the latest tax regulations across all Mutual Fund Categories.

Coming back to our question.

Are Debt Funds Still Better Than FDs?

Of course! Debt funds are still investable for various reasons. 

You can invest in a specific type of debt fund that aligns with your goals. It offers a safety net against equity volatility.

Sure, taxation may no longer be as efficient as it used to be. But that’s not the only parameter to judge debt funds. They have a lot more to offer than FDs.

Investors willing to slightly increase their risk appetite to generate post-tax returns similar to debt fund schemes (pre 31st Mar 2023 tax era) can explore hybrid funds. For example, Equity Savings Funds, Hybrid Debt Funds, Multi-Asset Funds, and Various other Asset Allocation Funds.  

FD vs Debt Fund: Where Would You Invest?

Both FD and Debt Funds offer various benefits to strengthen your financial goals. If your focus is on security and guaranteed returns, Fixed Deposits would be a better fit for you. 

Otherwise, debt funds have the potential to offer superior returns without changing your risk profile and also help with portfolio balancing. 

If you are struggling to decide which debt funds to choose, give us a call. VNN Wealth advisors will walk you through all types of debt funds and help you make a decision.