While searching for investment products which is aimed at capital protection and fixed returns, we turn our attention to various debt products available for investment. Let us go through some of them which is not very familiar with the normal investor community.You can see the following categories in the portfolio of almost all debt mutual funds.
1. Central Govt Securities - These are the most safest debt investment that one can make. They don have any default in payments.Even in case of bad situations, the government can print currency and payback the investment to the investors.
2. State Govt Securities - These are provided by respective state government and are less liquid compared to central govt securities. It has a higher yield than central govt securities and it may default on payment but in history it has never happened.
3. Public sector bonds - These are issued by public sector undertakings who borrow funds from the markets in terms of bonds.
4. Domestic Financial Institutaion bonds - These are provided by financial institutions like IDBI,ICICI and these are unsecured bonds.
5. Corporate Debentures - Private sector companies raise fund from investors through corporate debentures.
6. Commercial Paper - Private companies meet short term(1-6 months) fund requirements through commercial paper.
7. Certificates of Deposit - These are issued by banks and financial institutions.
Apart from these , there are other common products such as kisan vikas patra(money doubles in 8 years 7 months),NSC,Post office Deposits,Senior citizen scheme in post office,GOI bonds,PPF and Bank FDs.
Learn more about Debt investment
Showing posts with label debt mutual funds. Show all posts
Showing posts with label debt mutual funds. Show all posts
What is Liquid fund?
Liquid funds belong to the category of ultra short term debt funds. These can be used as alternative for short term bank deposits (deposits for less than a year).
1. They invest in debt instruments which have maturity of 1-2 months.
2. They have a lock in period of only few days unlike banks wherein you have to pay penalty if you preclose your FD.
3. They have a lower tax rate than a bank FD for a person in 30% tax bracket.The tax on dividend paid out is less than the income tax slab rate of a person in 30% tax bracket.
4.The interest rate varies with the market and it is a good option in a increasing interest rate scenario unlike bank FDs where interest rate is fixed.
5. They accept a minimum investment of 10,000.
6. These are suitable for investors who don want to lock in their money at banks for a shorter while but at the same time want to get interest on their amount.
1. They invest in debt instruments which have maturity of 1-2 months.
2. They have a lock in period of only few days unlike banks wherein you have to pay penalty if you preclose your FD.
3. They have a lower tax rate than a bank FD for a person in 30% tax bracket.The tax on dividend paid out is less than the income tax slab rate of a person in 30% tax bracket.
4.The interest rate varies with the market and it is a good option in a increasing interest rate scenario unlike bank FDs where interest rate is fixed.
5. They accept a minimum investment of 10,000.
6. These are suitable for investors who don want to lock in their money at banks for a shorter while but at the same time want to get interest on their amount.
What is a floating rate mutual fund?
In th debt category of mutual funds, one important variety is Floating Rate Mutual Funds.
Objective
To provide stable rate of return without much volatility arising out of interest changes.
How it works?
Unlike a typical debt fund which buys a govt security or a corporate bond at a fixed rate of return, floating rate funds invests in debt instrument which offers a variable rate of return depending on the interest rate in the market.
Eg. A debt fund would invest in a govt sec giving a return of 6%. When the interest changes to 8%, the govt sec would still give you only 6%. However a floating rate debt instrument will adjust its return to 8% as per the inflation rate in the market.
When it works well?
It works well in an increasing rate scenario as what had happened in last 2-3 years. When you invest in a floating rate fund when interest rate is at 6% and when it increases to 8% in a year, you stand to get benefited.
However in a falling rate scenario, you would lose your return on your investment.
Who should buy?
People who want to leverage the interest rate changes in a increasing interest rate scenario.
Objective
To provide stable rate of return without much volatility arising out of interest changes.
How it works?
Unlike a typical debt fund which buys a govt security or a corporate bond at a fixed rate of return, floating rate funds invests in debt instrument which offers a variable rate of return depending on the interest rate in the market.
Eg. A debt fund would invest in a govt sec giving a return of 6%. When the interest changes to 8%, the govt sec would still give you only 6%. However a floating rate debt instrument will adjust its return to 8% as per the inflation rate in the market.
When it works well?
It works well in an increasing rate scenario as what had happened in last 2-3 years. When you invest in a floating rate fund when interest rate is at 6% and when it increases to 8% in a year, you stand to get benefited.
However in a falling rate scenario, you would lose your return on your investment.
Who should buy?
People who want to leverage the interest rate changes in a increasing interest rate scenario.
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