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Tuesday, June 25, 2013

Choose Bond funds that invest in instruments with good credit quality

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Fixed income investors keenly watch interest rate movement in the economy to shift their investments in either short term or long-term debt mutual funds. While short-term debt funds benefit in a high interest rate scenario, long term debt funds generate higher returns in a falling interest rate scenario.


This is because long-term bond prices (net asset values, or NAVs) and interest rates (yields) move in opposite directions. A fall in interest rates will result in a rise in bond prices and positively impact long-term debt and gilt fund NAVs (returns).


Talking about interest rates, RBI has lowered its repo rate by 125 bps (1.25%) to 7.25% between April 2012 and now. Investors who entered long-term debt funds since April 2012 have gained 14% annualized returns until May 31, 2013.


But should investors continue to invest in these funds until the rates bottom out or book profits and invest in funds with more stable returns such as short-term debt funds?


This is the time to look at dynamic bond funds, because — as the name suggests —these funds have the flexibility to adapt to changing market situations.


The increasing popularity of dynamic bond funds can be gauged from the sharp rise in their average assets under management (AUM) from Rs 2,048 crore in March 2011 to Rs 23,113 crore in March 2013 (more than 10 times). They have also provided superior returns when compared with its category benchmark


An analysis of dynamic bond fund portfolios reveals that the average maturity of these funds is dynamically managed vis-à-vis interest rates to maximize their returns. Further, in terms of portfolio quality, dynamic bond funds have maintained optimum credit quality of their debt investments. In the past three years, they invested over 70% of total assets in sovereign and highest rated debt instruments, that is, Gilt, AAA rated and P1+ papers.


It is difficult for retail investors to take a call on interest rate movement and decide on the type of fund to invest in. Dynamic bond funds help address this uncertainty as fund managers take the call and tactically manage interest rate risks for the fund to earn superior returns. However, investors must note that these funds carry the likely risk of a fund manager's call going wrong and result in under-performance.


Hence, checking the track record of the fund house and the fund manager is important while selecting a good fund. A typical investment horizon for these funds is at least three years and is suitable for investors with a moderate risk-return profile. Most funds levy a 1% exit load in case of redemption within one year.

Happy Investing!!

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You can write back to us at PrajnaCapital [at] Gmail [dot] Com

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Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. ICICI Prudential Tax Plan Invest Online
  2. HDFC TaxSaver Invest Online
  3. DSP BlackRock Tax Saver Fund Invest Online
  4. Reliance Tax Saver (ELSS) Fund Invest Online
  5. Birla Sun Life Tax Relief '96 Invest Online
  6. IDFC Tax Advantage (ELSS) Fund Invest Online
  7. SBI Magnum Tax Gain Scheme 1993 Invest Online
  8. Sundaram Tax Saver Invest Online
  9. Edelweiss ELSS Invest Online

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Best Performing Mutual Funds

    1. Largecap Funds Invest Online
      1. DSP BlackRock Top 100 Fund
      2. ICICI Prudential Focused Blue Chip Fund
      3. Birla Sun Life Front Line Equity Fund
    2. Large and Midcap Funds Invest Online
      1. ICICI Prudential Dynamic Plan
      2. HDFC Top 200 Fund
      3. UTI Dividend Yield Fund
    1. Mid and SmallCap Funds Invest Online
      1. Reliance Equity Opportunities Fund
      2. DSP BlackRock Small & Midcap Fund
      3. Sundaram Select Midcap
      4. IDFC Premier Equity Fund
    1. Small and MicroCap Funds Invest Online
      1. DSP BlackRock MicroCap Fund
    1. Sector Funds Invest Online
      1. Reliance Banking Fund
      2. Reliance Banking Fund
    1. Tax Saver MutualFunds Invest Online
      1. ICICI Prudential Tax Plan
      2. HDFC Taxsaver
      3. DSP BlackRock Tax Saver Fund
      4. Reliance Tax Saver (ELSS) Fund
    2. Gold Mutual Funds Invest Online
      1. Relaince Gold Savings Fund
      2. ICICI Prudential Regular Gold Savings Fund
      3. HDFC Gold Fund

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Mutual Fund Application Forms Download Any Applications
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