Based on the ‘investment objective’, the mutual fund schemes can be broadly classified as either Equity Funds or Debt Funds. This classification is based on the asset allocation of the fund’s investments.
Equity Funds invest in Stocks / Shares. Equity Mutual Funds typically ensure that they invest at least 65% in equities and the rest in fixed income securities.
In case of Debt mutual funds, they invest in various fixed income instruments like bank Certificates of Deposits (CDs), Commercial Papers (CPs), treasury bills, government bonds (G-secs), PSU bonds and corporate bonds/debentures, Company Fixed Deposits, cash and call instruments, and so on..
Most of the Debt funds do not invest in Equities or shares. This is again dependent on the fund’s investment objective. Some Debt funds do invest in equities and hence these are called as ‘Hybrid Debt Funds’ or ‘Blended Debt Funds’.
In this post, let us understand – What are different types of Debt Mutual Funds? Where do Debt funds invest? Are Debt funds suitable for short term & long term financial goals? What are the advantages or benefits of investing in Debt funds? Debt Funds Vs Bank Fixed Deposits.
Types of Debt Funds
Equity funds invest in shares and these investments can be held as long as possible (based on the fund’s strategy). Debt funds invest in fixed income securities like bonds, deposits etc., and these investments have fixed tenure (varying time-frames). The primary aim of a debt fund is to generate steady returns by investing in ‘interest’ paying securities.
So, there are various types of Debt Mutual Funds that invest in various fixed income securities of different time horizons. (Time-horizon is from Fund’s view-point and not from an investor’s point of view.)
- Liquid Funds / Money Market Funds
- Where do these funds invest? – These funds invest in highly liquid money market instruments that provide easy liquidity. The period of investment in these funds could be as short as a day. (There are several money market instruments, including treasury bills, commercial paper, bankers’ acceptances, deposits, certificates of deposit, bills of exchange etc)
- What are the Expected Returns? – Investment Returns from Liquid funds can be slightly better than Savings Bank Account. Returns on these funds tend to fluctuate less when compared with other debt funds.
- Who should invest in Liquid funds? – If you want to park your surplus cash for very short-periods say 1 to 3 months, opt for these funds. Do not invest in Liquid Funds for a longer period as these offer low single-digit returns at best.
- Examples : Axis Liquid Fund & HDFC Liquid Fund etc.,
- Ultra Short-Term Funds
- Where do these funds invest? – These funds are also known as Liquid plus funds or Cash / Treasury Management Funds. They generally invest in very short term debt securities with a small portion in longer term debt securities. (Funds investing in slightly longer duration debt securities than Ultra short term funds are referred to as Short term funds)
- Returns – These funds can generate better returns than Liquid Funds. Suitable for investors who are willing to marginally increase their risk.
- When to invest in Ultra Short-term funds? – If you have surplus money which needs to be invested for say 3 to 9 months, you can consider investing in these funds.
- Examples: Axis Banking Debt Fund, IDFC Banking Debt Fund,Birla Sunlife Short-term fund etc.,
- Income Funds
- Where do these funds invest? – They invest a major portion in various debt instruments such as bonds, corporate debentures, government securities and money market instruments of various maturities and issuers. These funds can further be classified as, Gilt Funds, Long-term Income Funds and Dynamic Bond Funds. Gilt Funds invest in government securities of medium and long term maturities issued by central and state governments. Dynamic Bond Funds invest in debt securities of different maturity profiles. These funds are actively managed and the portfolio varies dynamically according to the interest rate view of the fund managers.
- Returns – You can expect better returns on these funds when compared with Short term or Liquid funds. But you should be ready to take higher risk. These funds generally tend to give better returns when the interest rates have peaked and when the interest rate cycle is in downward trend. Most of the gilt funds or income funds have given double digit returns over the last 1 to 2 years.
- Who can invest? – These funds are suitable for investors who are willing to take a relatively higher risk and have longer investment horizon (say 1 to 3 years). You can consider Gilt funds in a falling interest rate scenario. Invest in a Dynamic Income fund if you want to gain from both rising and falling interest rate scenarios. But, dynamic funds can have high interest rate risk associated with it.
- Examples : L&T Gilt Fund, SBI Magnum Gilt, HDFC High Interest Dynamic Fund, IDFC Dynamic Bond Fund, TATA Dynamic Bond Fund etc.,
- Monthly Income Plans (or) Hybrid Debt Funds
- Where do these funds invest? – These funds invest in a mix of Debt and Equity in the proportions of say 80:20 or 70:30 or other proportions of similar kind. The objective of these funds is to provide enhanced regular returns to risk-averse investors by taking small positions in equity assets. The debt portion ensures stability, safety and consistency, while the equity instruments in the portfolio boost the returns. Kindly note that MIPs are market-linked products (to the extent of their equity portfolio).
- Returns – Good MIPs can give you better returns than bank fixed deposits. Infact, some of the MIPs sometimes do give double digit growth depending on the interest rate cycle.
- Who can invest? – If you have a financial goal which is 2 to 3 years away from now, you can surely consider investing in MIPs instead of investing in bank FDs or RDs.
- Examples : Kindly read ‘Best Mutual Fund Monthly Income Plans‘.
Below are some of the other forms of Hybrid Debt funds.
- Capital Protection Funds: Capital Protection Funds (CPFs) are close-ended schemes. These funds invest in debt instruments in such a way that at the end of the term (tenure) of CPFs, the value of debt investment is equal to the original investment in the fund. The equity portion aims to add to the returns of CPFs at maturity. Do note that these funds are oriented towards protection of capital and do not offer guaranteed returns. These funds are rated by Credit Rating Agencies like CRISIL / ICRA.
- Fixed Maturity Plans : These are also close-ended schemes and are similar to CPFs. These funds have fixed tenure like 400 days, 1000 days etc., Units of these close-ended funds can be purchased only during the New Fund Offer period and cannot be redeemed during the tenure of such funds. To provide liquidity to investors, FMPs are also listed on Stock Exchanges. If you are looking to park your money for a fixed tenure during uncertain interest rate movements, FMP is the answer.
Risk Vs Return of various Debt Funds
As discussed above, the longer the maturity of the fixed income securities, the higher the interest rates risk. Accordingly, risk-reward relationship can be represented as below;
Debt Funds & Tax Implications
From taxation point of view, MF schemes that invest at least 65% of its fund corpus into equity and equity related instruments are treated as Equity Funds.
Mutual Fund Schemes that hold less than 65% of their portfolio in equities and equity related instruments are treated as Debt Fund (Non-Equity Funds).
- Long Term Capital Gains (LTCG) – If you make a gain / profit on your investment in a Non-Equity Mutual Fund scheme (or in a Debt Fund) that you have held for over 3 years, it will be classified as Long Term Capital Gain. The LTCG tax rate on Debt Funds is 20% (with indexation benefit).
- Short Term Capital Gains (STCG) – If you make a gain / profit on your Debt fund (or other than equity oriented schemes) that you have held for less than 36 months (3 years), it will be treated as Short Term Capital Gain. The gains are taxed as per your Income Tax Slab rate. (You may like reading – “Mutual Funds & Tax implications“)
My Opinion (Debt Mutual Funds Vs Bank Fixed Deposits)
Debt Mutual Funds offer several benefits. But most of the small investors know little about them and prefer to invest in Fixed Deposits or Recurring Deposits. So, let’s compare debt mutual funds with bank deposits.
- TDS is applicable on Bank FDs/RDs, if your interest income exceeds Rs 10,000 a year. The other issue is that the interest income is taxed on annual basis. TDS is not applicable on Debt fund redemptions. Also, the tax is deferred indefinitely till you redeem your Debt fund units.
- One more advantage with debt funds is that the gains from a Debt Fund can be set off against Short-term & Long-term capital losses (if any) from your other investments.
- If you have lump sum money to be invested in Equity oriented Fund, you can opt for STP (Systematic Transfer Plan) from a Liquid Debt fund to an Equity fund of your choice (within same AMC).
- Debt Funds can give better returns than your Savings Bank Account & Bank deposits.
- Safety of capital is almost the same with both the options (Debt MFs & FDs). FDs may offer you assured returns but Debt funds can offer you higher post-tax returns. (You may like reading – ‘Why you should avoid investing in Bank FDs/RDs for longer periods)
- If you are in 20-30 per cent tax bracket, tax-efficient debt funds can be more beneficial to you than FDs.
- Investors generally compare debt funds’ past returns with FD or Bank interest rates. But, Debt Fund returns should be compared to FD rates that were prevailing at the start of the period of comparison.
- Debt Funds can also be considered for investment during your Retirement phase for Systematic Withdrawals.
- Debt Funds are as liquid as your Bank deposits. However, some funds can levy Exit Load for exiting before the minimum holding period. Even a 0.5% to 1% exit load can shave off a significant portion from your gains. So, have an eye on exit load.
If you have any financial goal(s) which is less than 5 years away, which can be met with 8% to 10% rate of return (or) when you are not comfortable with high volatility (risk) then you can surely consider investing in Debt Funds.
(Image courtesy of Stuart Miles at FreeDigitalPhotos.net)
Hi Sir,
What are the floater debt funds & what’s your suggestion for the duration its ideal for?
Regards
Anubhav
Dear Anubhav,
May I know your investment objective and time-frame?
“A mutual fund that allocates the majority of its assets in debt instruments with floating interest rates (floating rate instruments) are known as Floater Funds. These funds are categorized under debt mutual funds. They take advantage of the fluctuation in interest rates to generate quality returns for investors.”
You may go through this article..
Hi Sreekanth,
Intention of the debt fund is for 1 yr expenses (e.g. my kid school fees which will go quarterly – so 4 qr fee).Though i understand liquid fund or ultra short fund is a option but just wanted to know the option for floater funds. Is the risk is more or less for 6 months to 1 yr target for floater funds.
Thanks
Anubhav
Dear Anubhav,
You may kindly stick to Recurring Deposit/FD for this kind of requirement.
Thankyou Sreekanth …
Hi Sreekanth,
Thanks for your informative blog. I plunged into MF world on reading your insightful articles.
I started investing with liquid funds to make better returns out of idle cash in savings account. I chose DSP BR liquidity fund (Direct) with weekly dividend re-investment option. However I feel I am getting very less returns compared to savings interest (or) FDs. Invested amount for 1 year – 2.7 lakhs, Current portfolio – 2.76 lakhs. The return is meager 2.2%.
Is it because of poor performance of the fund over the past 1 yr (or) whether the fund option I have chosen is meant to give only this little?
If I had chosen growth option, what would be the tax implication if I redeem the units?
Regards,
Arun
Dear Arun,
Liquid funds performance can be compared with Savings account interest and not with FDs.
DSP BR liquidity fund – Growth option has given returns of around 7% in the last one year.
So, it can be the case with Div Re-investment option..
Thanks for the clarification, Sreekanth.
What would be my taxation during redemption, if I switch the current folio to growth option?
Dear Arun,
You may kindly go through this article – Mutual Funds Capital Gains Taxation Rules FY 2018-19 (AY 2019-20) | Capital Gains Tax Rates Chart
Thanks for the link, Sreekanth!!
Dear Sir,
Thanks for your reply.
Can you provide me your opinion on following MF scheme
Sundaram Select Debt – Short Term Asset Plan – Direct Plan (G)
there one confusion for me as Sundaram MF says it is Short Term Debt Plan while Money control categorized as Liquid Fund ….please clarify and give your comment sir.
Apart from this also would like to know why Liquid fund are most suitable for 1 to 3 months while other Debt fund(Short Term,Long Term, Gilt..etc) are suitable for 3 months or above as both fund are providing almost single figure return
Regards,
Ajay Mokani
Dear Ajay,
I believe it’s a Short term Debt fund, its benchmark is Crisil – Short term Bond.
The securities that are invested by a liquid fund can be different from other debt funds, hence the risks & returns may vary.
Plus Sundaram will know better than Moneycontrol about its own plans 😉
Hi Sreekanth, I am trying to read each of your articles and in this last one week itself I’ve learnt a lot. Infact, very clear and detailed article on Debt Funds explained in Simple and understandable terms.
One question I have, For a SIP portfolio, is there a need to invest in Debt funds to balance the portfolio? If yes, then will 20% of my entire portfolio in Debt Fund be okay or lesser than that?
I have shortlisted BSL Dynamic bond fund.
My next financial goal in 5yrs away.
Dear Yavika,
Personally, I invest in a balanced fund for goals which are around 5 years away. Typically an equity oriented balanced fund invests around 20 to 30% of fund corpus in Debt related securities.
Read: What are Balanced funds?
Thanks a lot Sreekanth… I have read this link and selected few funds. I am going to invest around Rs 30 lakhs in MF schemes for long term(>10yrs) and for wealth creation. Is it advisable to have around Rs 5 -6 lakhs in Debt Fund(ICICI Pru Long term) to balance my portfolio or should I go for a combination of Large cap, Multi cap, Small/Mid cap and Balanced Funds?
I am little confused over this, and troubling you again on this! Few Financial Advisors suggested 20% in debt Mf in current scenario. I was almost investing through them while I chanced upon your blog and didn’t go back to them.
Dear Yavika,
There is no thumb rule as such that one needs have certain ratio of allocation between Equity & Debt.
Let’s say, you can afford to take high amount of risk, then you can allocate funds across large/multi/mid-cap and also Equity oriented balanced funds. You may allocate higher amount to balanced funds instead of debt funds. You may continue with these investments till you have 2 to 3 years to reach your goal.
After that, you may reduce your allocation to Equity and move to little safer investment avenues.
If at all you would like to add one Debt fund, yes you may add one Dynamic Bond fund, like the one you have mentioned.
Personally, I prefer investing in full in Equity funds for my long term goals, I believe that one can invest as much as possible in Equities and give as much time as possible to get decent Inflation adjusted Returns.
I understood now…thank you very much!
Dear Sreekanth.,
It’s once again krishna., thanks for all your work & hearty wishes for a Happy New year.,
Till now i was executing all my investments based on your inputs, it has really served my purpose & very helpful.,
Since all my goals are more than 10 yrs, i have invested mostly in Equity funds ( large , Multi, Mid & Small).
I need u r inputs for investing in Debt funds, to balance my portfolio to the extent of 20%-30%; My investment goals are long term only.
Can i invest in Credit opportunities fund ( BSL Medium Term Opportunities fund)
Regards
Krishna
Dear Krishna,
Happy new year to you too 🙂
Thank you for following my blog posts!
Besides, mutual funds do you invest in other investment avenues (like PPF/EPF etc)??
Hi Sree.,
I am an NRI, i do not have PPF / EPF accounts.,
Dear Krishna,
If you are investing for long-term goals and planning to balance out your portfolio, you may consider options like Dynamic bond fund and MIPs.
Read:
Best Debt funds.
Best MIP funds.
Thanks Sree.,
I have invested in BSL Medium Term Plan.,
Planning to maintain @10% as debt component on my total portfolio.,
Thanks
Sir I have FD 35 lakh and have some amount without FD.I would like to invest debt fund. Please suggest me how safe mutual debt fund? and which debt fund can I choose with low risk? thank you
Dear vinod,
May I know your investment objective and time-frame?
Kindly note that mutual funds are subject to market risks and they are not totally risk-free.
Sreekanth,
I believe this article was written quite sometime ago, can you please update it? Since now is the time (with curent market conditions) for aggresive debt funds with lumpsump amounts? I would like your recommendations for various funds based on your analysis – just like you do it for equities?
Dear Manja,
Kindly read my article on Best Debt Funds 2017, have updated the list in Oct 2016.
Sir I hv FD of approximately 7 lacs in bank but I am seeking for good liquid debt fund in order to save tax, to withdraw whenever emergency .pls advice me for best liquid funds in current days & also give me suggestions for distribution of above money in 2 to 3 good liquid funds. Thank you sir.please help me.
Dear kamlesh,
Kindly read:
Best Debt funds.
Best Arbitrage funds.
Dear Sreekanth
I have about 10 Lac in my saving account and Reliance Equity Opportunities-Growth Fund and I need this money after 3 years for my elder son’s Education. What would you suggest where to invest this amount ie in PPF or FD or some best Mutual Fund like MIP etc? More over, I can earn 1 lac per month and I’m investing 40%(Rs.40000) of my monthly income into Equity related Mutual Funds since January,2016 and I am not sure what to do with the remaining 40% amount(after deducting my household expenditure). For this financial I have already invested Rs.150000 in my PPF account.Is it advisable to invest remaining 40% in Monthly scheme or some where else?
Regards
Dear Sanjeev,
40% in equity funds, 20% for living expenses and 40% need to be invested,am i right?
If you need money in next 3 years, you may ignore investing in PPF account.
You may consider options like MIP (for next 2 years) + Short term debt fund (for next 2.5 years), later you may opt for FD just before the goal year.
Read:
Best Debt funds.
Best MIP Funds.
Dear Sreekanth
Thanks for reply.You are absolutely right.So I need to invest 10 Lac(from my saving account and Reliance Equity Opportunities-Growth Fund ) in MIP (for next 2 years) + Short term debt fund (for next 2.5 years) and where to invest 40% of my monthly income?
Regards.
Dear Sanjeev,
May advice was for this 40% only.
May i know do you have any other financial goals?
Dear Sreekanth
I have no other goal except retirement after 13 years!
Regards.
Dear Sanjeev,
You can consider one diversified equity fund and one mid-cap fund for this goal.
Read:
Best Equity funds
Retirement goal planning & calculator.
Dear Sreekanth
Thanks for valuable advice and HAPPY NEW YEAR
Regards
On a lighter note, you do not want to visit relakhs in this month??
Happy new year dear, in advance 🙂
Thank you!
3 days ago, rbi had not cut the rates little bit as per expectations of the market and so bond yield increasing sharply.
as a result, dynamic bond fund, income fund, gilt fund etc. all debt funds became negative.
so what to do in this scenario ?
what to do when bond yield increasing ?
how to save one self from the losses of the debt funds’ investment ?
Dear adityaraj ..May I know if you have already invested in Debt funds? Scheme names & time-frame??
I’ve a common question.
Generally from taxation part all debit funds attracts two types of taxation (stcg and ltcg) except arbitrage funds.
What is the point in recommending different types of fund for different persons ? Though the tax is going to be same and knowingly MIP funds or Long Term debt funds are yielding high returns..
Why don’t you recommend same MIP fund or long Term debt fund to all? Why do you ask for investment horizon? Please clarify..
Dear Boopathi,
Investment can not be done looking at taxation only.
However, I have provided all the possible details in article (tenure, risk Vs return, tax implications etc), so that readers can take suitable decision based on their requirements.
Hi Sreekanth,
This what I have understood so far regarding MF STCG and LTCG. Please let me know if my understanding is correct or not.
1.In Bank FD, TDS is deducted @ 10% if your interest is more than 10,000 in a financial year.
2.In DEBT mutual funds, if I redeem or switch the MF BEFORE 3 years,the tax on the gains will be applicable as per my tax bracket?
3.In DEBT mutual funds, if I redeem or switch the MF AFTER 3 years,the tax on the gains will be applicable and i.e. flat 20%?
So suppose,if bank FD and MF both gave me 9% of return AFTER 3 years so bank will deduct 10% TDS and MF will deduct 20% LTCG.
So in this scenario,investing in MF will be a loss and bank will be profitable?
If the above statements are correct, then the DEBT MFs like ultra short term funds and short term funds which are for short term investments like 3months – 1 year and suppose if I come in 30% bracket,so will 30% get deducted from my gains?If yes,will it be really profitable to invest?
Dear Saurabh,
1 – Yes. However, if your income tax slab rate is say 20% then you need to pay the differential tax dues when filing your ITR. Read: Misconceptions on TDS.
2 – Yes.
3 – Yes (with indexation benefit).
FDs – tax is payable on the accrued income every year. Whereas taxes are payable only if you redeem the units.
It all depends on the returns generated & the tax bracket you are in.
Also, the FD interest rates for 3 months to 1 year are low considering the fact that interest rates are falling. In such a scenario, ultra-short term or short term debt funds may out-perform the FDs.
BSL Treasury OPT F Direct Growth
BSL Dynamic Bond F Direct Growth
HDFC Income Fund Direct Growth
BSL MIP 2 Wealth 25 Direct Growth
Thanks so instead of those 7 8. I trim it down to above 4. Are these funds okay ?
Dear Siddharth..I believe that 1st one and 3rd fund fall under the same Debt-Income fund category only. Kindly have a re-look.
Yes you are right, I am going to choose either of them that is performing better than the other one. Thanks so much for looking in to and giving your comments on it. Good day !
Hi
I asked you my queries few days back. I am almost done with my investment decision, and I want to lock it this week itself. Let me give you some idea, how I want to plan my 100% investment:
1. The duration of my investment is from 2 years to 6 years.
2. Looking to the investment horizon I think I should divide my investment in ST debt fund, some in Hybrid and some in LT Debt and Credit Opportunity fund(Correct me if I am thinking wrong).
3. These are the funds which I have short listed:
1 BSL Treasury Optimiser Fund Growth -10%
2 HDFC Medium Term Opportunity Fund Growth -10%
3 BSL Dynamic Bond Fund Growth -10%
4 HDFC Short Term Fund Growth -10%
5 Kotak Medium Term Fund Growth -10%
6 DHFL Pramerica Medium Term Income Fund Growth -10%
7 BSL MIP 2 Wealth 25 Fund Growth – 15%
However I think you are more experienced and knowledgeable person, kindly let me know if these funds are good for investing, or I should replace any of them with some other?
4. Now the left 25% of investment, I wish to invest in equity LT or balanced equity fund. I can hold the investment for at least 4-5 years if needed, but I want better return than that of in debt fund, so that over all the rate of my investment gets better than that of just debt fund.
Kindly give your VALUABLE INPUTS. Thanks in advance !
Dear Siddharth,
Owing to the downward trend in interest rate cyclce and assuming the rate cuts going forward, the debt funds may give you decent returns.
You may add a balanced fund like TATA balanced fund to your portfolio.
Read: Best Balanced funds – Equity oriented.
Thanks for the reply, yes I am going to start SWP/STP from these Debt funds to two Balanced Funds ie
TATA Balanced Fund anf HDFC Balanced Fund. Do you think my strategy is well ?
Also, can you please let me know if I need to ignore any of the debt fund from the list I sent you?
Dear Siddharth,
Given a choice now, Personally I may not invest in so many Debt funds, instead I will pick one Short-term debt fund, one Dynamic bond fund and one MIP fund.
So you may trim down your debt MF portfolio if you wish.
Hello Sreekanth,
We had a conversation regarding the investment few months back:
I had invested money in 4 Funds.
BSL MIP 2 Wealth 25 Fund Growth
BSL Short Term Opportunity Fund Growth
BSL Dynamic Bond Fund Growth
BSL Treasury Optimizer Fund Growth
Initially all the funds performed well, however after the demonetization, the dynamic bond fund and treasury optimizer funds are right now showing negative returns.
I am concerned about the funds which are showing negative returns. Shall I ignore this for now as my investment horizon is 3 years+? or looking to the current scenario I should switch my investment to short of ultra short term funds?
Also the return on MIP is also not so attractive, if I compare the return on MIP vs 7.1 % FD , FD returns is still higher than that of MIP fund.
Please suggest what I need to do ? Switch ? or sit back and hold the investments for the duration that I had i.e. 3 to 5 years.
Thanks !
Dear Siddharth,
Let’s not forget the fact that MIP funds also carry certain amount of risk and the returns are not guarenteed.
The recent negative or poor performance of MIP funds, in fact most of the Gilt or Debt funds is primarily due to no interest rate cut done by RBI. (I dont think demonetization is primary reason)
If the rates are going to be stable, the returns generated by debt funds or Debt oriented hybrid funds may not be as good as they were during the last 2 to 3 years.
So, we may have to trim down our expectations a bit. Also, do calculate and analyze the returns after adjusting for taxes.
Thanks for the reply.
Is it viable to Switch ? or sit back and hold the investments for the 3 to 5 years?
Dear Siddharth,
Somehow, I sense that the returns can be stable from here on from hybrid funds.
Got it. Thanks !
GIVE YOUR VALUABLE INPUTS FOR
KOTAK INCOME OPP. FUND
BIRLA SL DYANMIC BOND FUND
HDFC INCOME FUND
Hi I have one lakh ra in FD and i am in 30 % tax slab rate , so should i invest in debt mf or liquid short funds for say 3 to 6 months or should i invest un long term.
Your comment on both scenario will be helpful.
Thanks
Dear Neeraj ..If you need this money in next 3 to 6 months, I believe that don’t chase returns. Safety of your capital is important.
yes actually you suggested me Birla Sunlife MIP II wealth 25 plan in my last query, i am planning to invest my half of the savings in this plan and wish to invest the rest of the savings in either debt income fund or may be short term fund. actually for rest of the savings i wish to do investment with a time horizon of 3 years, i may need to withdraw investment after that and bit safer than MIP plans, so please suggest me 2 or 3 best funds so i can invest equally in each of them.
Dear Siddharth,
You may consider – HDFC Short Term Fund & Birla Sunlife Dynamic Bond Fund.
Read: Debt funds & tax implications.
Hi I m confused to see so much mutual funds scheme.
I have time horizon of 3 years n need to invest in safe funds. Can u list down 3 best debt funds to me ?
Dear Siddharth..Are you looking for fixed returns? (safe funds)?
If you are ok to take a little bit of risk you can consider investing in an MIP fund for 3 years.
Hello ,
I was having a Term Deposit which is maturing next week. I didn’t know much about MF before, now I know bit of it and now I think it is better than reinvesting in FD. I want to invest money in any of the debt fund, I don’t know which one should I choose ?
Short term or income or liquid etc fund?
I don’t need this money for next 5 years at least. So if possible please suggest me that type of debt fund I should go for..
Also if you can let me know the precise fund name which is performing better.
I don’t have any target as my regular monthly income is enough and I am not going to use this investment for at least 5 years.
Also, pls suggest is it a good idea if I invest in any of debt fund and do SWP OR STP every month and invest the same in any equity fund ? Is so then also suggest type of equity fund I should select.
I want to take minimal risk.
Dear Siddharth,
If you do not need this money for next 5 years and have a horizon of 5 years, then combination of a balanced fund equity oriented + an MIP fund makes sense.
Ex – HdFC balanced fund + Birla Sunlife MIP II wealth 25 plan. If you do not want to take high risk then you may allocate higher % to MIP fund.
Read:
Best Balanced funds.
Best MIP funds.
MF taxation rules.
Thanks for the reply and giving such useful advice !!
So shall I invest lump sum amount in any of the Debt MIP plan and then begin STP or SWP to the Equity balance fund?
Dear Siddharth,
You can invest in MIP and have a STP from a liquid debt fund to Equity fund.
Great !! Thanks so much ..
Dear S, Reddy,
Appreciate your initiative of creating awareness of Various Investment options for people like us.
My query is about management of Emergency fund.
As per thumb rule, I have managed to accumulate emergency fund of Rs. 5 lakhs. Now this amount is sitting idle in my savings account. Kindly suggest best options to manage this amount so that I can reap benefits of both Liquidity (in case of emergency) as well as better returns compared to savings account. Would appreciate if u can suggest how to go about breakup of this fund among suggested investment options?
Dear SHASHIDHAR,
You can consider options like Liquid fund, Ultra Short-term debt fund and Arbitrage fund.
The gains from arbitrage fund are tax-free if units are held for 12 months. But kindly note that the redemption pay out can happen only after 2 to 3 days.
Read:
Best Debt funds.
Best Arbitrage Funds.
Hi Sreekanth,
You articles are very informative and I would like to thank you for your initiative and effort of imparting impartial and truthful information in a time when the internet is filled with untrustworthy clutter.
I request your advice in one financial decision I am faced with.
I had started a RD 3 yrs back to build corpus for my housing project installment demands.
I wanted to pay up a bigger part from my pocket without taking a big housing loan.
I have almost 8 lakhs of money in te RD which I want to liquidate now and park in a debt fund because I now fall in the 20 – 30 tax bracket.
I have shortlisted Birla Sunlife Dynamic Bond fund (G)
Is it wise to invest all of the amount in a single fund, should I diversify?
if I should then can you advise some alternatives?
Dear Surabhi ..When do you need this money?
Thank your for your kind words and appreciation!
hi,
I have corpus of ~5 lakhs from my past FDs maturing soon. I would need regular interest income to pay for my son’s school fees from next year. Balance savings are being invested in equity mutual funds for longer term goals.
1) In this scenario, would u suggest a dynamic bond fund or a short term fund? As i understand, in the dynamic bond fund, the fund manager decides the tenure of underlying securities, based on the interest rate scenario. However, if i choose a short term fund now, then i might need to switch to long term fund in future, depending on the interest rate scenario.
2) Would you advise me to go for MIP with debt: equity allocation at 80:20 so the equity portion can aid the annual hike in fees?
3) Also, could you please suggest the best fund/s under your above suggested category?
Thank you very much,
Kajal
Dear Kajal,
If you are totally dependent on this income then you can invest in a Dynamic bond fund (Growth) and then create SWP – Systematic Withdrawal Plan (periodic) from this fund.
If you can afford to take a little bit of risk, you can consider MIP fund (growth) and set up SWP.
Read : Best MIP funds.
Dear Sreekanth,
I am an NRI and i need to arrange 1 lac rupees for my next year traveling. So shall i go for Ultra Short Term Debt?? and which one is the best scheme?
Thanks in advance.
Dear jeevan ..If your investment horizon is less than one year and if you are looking for a debt fund then you may consider Short term debt funds.
Read : Best Debt funds.
Hi,
I find your articles interesting and explanatory, thank you.
I am 29 years old, want to invest 2 lacs in fixed income product. I do not have any taxable income so I have the option of using 15G if I invest in Bank FD. But I am looking for good return by the end of my 3 year investment horizon.
Do you think since tax is not my concern I should continue with FD (ex. ICICI giving 8%, cumulative payout) which do not have expense ratio or exit load, , or can I still make significantly higher by investing in other debt instrument, and which ones? Debt MF?
Dear Rohini,
If you have around 3 years time-frame and would like to stick to debt/hybrid oriented products, you may consider investing in MIP MF schemes. You may get slightly higher returns when compared to FD.
Kindly read below articles;
Best MF MIP Schemes.
Best Arbitrage Funds.
Best Debt Funds.
Dear Shreekanth,
Kindly advise me the best debt oriented (80:20) balanced funds for 5 years tenure. I am at the age of 54 & 30% tax bracket.
Dear Jayanta,
You may consider Birla Sunlife MIP II Wealth 25 plan-Growth option.
It has equity allocation of around 25%.
Read:
Best MIP Mutual Fund Schemes.
List of Best Investment options.
Hello Bro
I just accidently landed on your website and must say you are doing a great job 🙂
I am 27 yrs old. My father retired 3-4 years back and has put all his money in FD and is getting around 10% Interest on his FDs. Now, I have convinced him and he is happy to redeem his Fds (Almost all of them matured 1-2 months back). Approximate amount is nearly 35-45 Lakhs. Besides, he is getting Pension of around 30k per month. So, he doesnot really need extra money on monthly basis beyond his pension.
I am already on Fundsindia.com myself since 3-4 years. So, thought of opening his account also there. But just now I read about difference in Direct and Regular plans and how difference in expense ratio between the two can effect returns.
Coming to my main questions, kindly suggest how shall we invest my Father’s retirement corpus of around 40 Lakhs. He can invest for longer duration of 3-5 years of even beyond. I think we should also keep around 5-10 Lakhs in some emergency type of fund which if required can be redeemed.
Also, will it be really worth to invest 40 Lakhs through Direct Plan (I think it will be lot of nuisance) or shall we go through Fundsindia itself..?
Waiting for your recommendation on breakdown of funds and allocation plus help regarding to invest Direct or Regular.
Thanks in advance:)
Dear Manjot,
Considering the fact that your father’s pension income is almost sufficient to meet his monthly living expenses, your strategy/decision to look out for better investment avenues is a prudent one.
Let me know if he has adequate Health cover?
Yes, it is advisable to save few lakhs in FDs + Liquid/UltraShort-Term Debt Funds to meet any unforeseen emergencies.
The remaining corpus amount can be invested in the below list of options;
*MF MIP funds (Growth Option).
* One Balanced fund
*Senior Citizen Savings Account Deposit.
* Arbitrage Fund.
Read:
List of Best Investment Options.
Best MF MIPs
Best Balanced Funds.
Why do you think that it is a ‘nuisance’ to invest in Direct plans? Are you referring to ‘Portfolio tracking issue’?
Kindly read: MF Utility online MF platform.
Hello
Now, I can see your reply 🙂
Actually, I had contacted Fundsindia for recommendation (For total 35 Lakh AMount). They suggested me to invest in 5 Funds equally (7 Lakh each) in Franklin India Ultra Short Bond Fund-Super Inst(G), HDFC Medium Term Opportunities Fund(G), Birla SL Dynamic Bond Fund-Ret(G), UTI Dynamic Bond Fund-Reg(G) and HDFC MIP-LTP(G).
Now as per your suggestion, we should choose MIP as well as Balanced fund. I see that you have mentioned debt funds mainly for emergency purpose but for investment, you have mentioned mostly equity exposure funds too (With some portion in equity). For balanced, and MIP funds, do you think Lumpsump investment would be fine..?
Regarding health insurance, he donot have any I beleive. Which policy would you suggest for him (67 Years old) having hernia.
Also, I am little confused since different people have different suggestion. If you had 40 Lakhs to invest lets say as retirement corpus, which funds would have you invested in (Lets say you pnly had option to go for lumpsump mode and only in mutual funds). 🙂
I appreciate your help in this regard
Regards
Dear Manjot,
Fundsindia too suggested a combination of Debt & MIP schemes.
I have given only a suggestion and not opined ‘you should choose’ 🙂
The reason for suggesting MIP and balanced fund is after considering your Father’s present financial profile and he also looking at 3 to 5 year time-horizon.
You will get confused if you consult many individuals for advice.
haha. Yes, I understand that consulting too many individuals is not a wise decision. But since it is my dad’s corpus and not my own, wanted to be extra cautious 🙂
Yes, they added MIP (One fund just) after my suggestion. They were reluctant to add even single MIP and were suggesting 100% debt.
I just want to be ask whether long term debt funds (Birla Dynamic Bond, UTI dynamic, HDFC Medium term opp etc) are better for us since we are looking for 3-5 years or are they riskier then short term debt funds..? And second thing if we choose MIP or say balanced fund, would it be ok to invest lump sump amount (Because I am of the opinion that a fund with equity exposure is best in SIP form. Happy to be proved wrong here.).
Also, if you have any good health insurance policy for him (67 years) in mind, pls suggest.
Thanks a lot.
Dear Manjot,
Dynamic bonds are relatively riskier than short-term bonds, but can generate higher returns comparatively (higher the risk, higher the return).
Lump sum investment in MIP, is ok.
Balanced Fund has been suggested so that it can push the overall portfolio returns to double digit.
SIP/Lumpsum, either modes should be fine if one has long-term view.
Since you are looking at 3-5 year time-horizon, you may opt out of balanced fund.
Health Insurance- Kindly read:
Best Health Insurance plans for Parents.
Evaluate these 11 vital factors when buying a health plan.
Best portals to compare health insurance plans.
For a NRI, is FD better investment than Liquid funds? Since there is no tax for NRI in FDs
Dear Manja ..Good question. Probably, Yes. But depends on which type of bank accounts you invest in & foreign country taxation rules.
Correct me if I am wrong, for a non-US NRI, the foreign taxation will only be the income earned there not on the FDs amounts invested in India. So the comparison should be only based on the direct tax benefit in India – am I correct?
However, lately, the interest rates are now as low as 7.5 %, a well chosen Ultra Short term in my opinion & experience will give more. Share your thoughts please.
Dear Manja,
Correct, was just referring to DTAA (Double taxation avoidance agreement, if any).
Considering the downward trend in interest rate cycle and also there is further room for rate cuts, we can expect decent returns from Ultra Short term debt funds (but some of it might have been already factored in). So, one has to take the decision as per his/her requirements.
Thanks Sreekanth. Just wondering, the STCG Tax (Short term Capital Gains) are applicable to NRI as well right? @20%
Dear Manja ..Kindly read: Mutual Fund Taxation rules..
Hi,
I want to invest around 15 lacs in debt funds. I can block 10 lacs for 3plus years and 5 lacs for 1 plus year. Please suggest a suitable debt mf portfolio. many thanks
Dear Nischal,
3 years : You may consider one Dynamic Debt Fund + one MIP aggressive Fund.
1 year : You may consider one Short term debt fund.
Read:
Best Debt funds.
Best MIP funds.
Nischal,
15 Lakhs is a substantial money. Although I have no business to interfere in your decision, I just want to learn your thought process. If I have a lumpsum money (any amount for that matter), I would diversify between Equity (again on Large and Mid-cap) and Liquid based on my risk appetite. Just wanted to understand why you chose everything for Debt. Unless of course you are already invested in Equity.
I generally use the Liquid funds to park the surplus funds and use that to do Systematic investment in Equity to benefit from the average out. Yes, when the market are down (like during Feb 2016) I heavily invest on top of Systematic to gain better average NAV. Let me know your thoughts
Hi, Sir
My Self Siva,
I am a 20 years old guy pursuing Chartered Accountancy(Final), at same time I am taking care of my father’s Buzz, I want to Invest Rs 6Lacs in any Mutual Fund which can be redeemed with in a span of less than 6 months.
Could you kindly assist me in this regard
Thanking you
Dear Siva..If you need this money in less than 6 months from now, suggest you to stay away from mutual funds.
Hi Sreekanth,
myself 35, a salaried person, single as of now. have got an investment-worthy amount of around 2L right now. What do I do so it yields me the most. I do plan for a longer time horizon. Also, what should be the ideal mix in my investment portfolio? I intend to do a SIP of around 15K/month to begin with.
Dear Anupam,
You may consider investing in Equity oriented mutual funds.
Kindly read:
Best Equity mutual funds 2016.
Top balanced funds.
You mean entire amount of Rs. 2 lakh be put into Equity linked MFs? Will that be prudent? and my question was a bit more than that. How do I balance my portfolio between Equity/Debt funds at this stage?
Dear Anupam,
Considering your profile (single) & your investment horizon, I have suggested equity funds.
You can have a balanced MF portfolio by investing in Equity + Balanced fund + MIP/Debt fund.
Ex : One Diversified Equity fund + One Mid cap fund + Balanced fund + MIP fund.
My age is 24.
I have no dependent on me.
I already have Mediclaim.
Dear Kamlesh,
If you are contributing to EPF, suggest you to decrease your PPF allocation. Invest as much as you can in equity mutual funds (considering your profile, you may afford to take high risk).
Direct plans can give better returns, go ahead and invest in Direct plans online.
You may consider TATA balanced fund.
For short-term goal – You may consider FDs + Short-term debt funds+ MIPs.
Kindly read : Best investment options..
Dear Srikanth,
My Gross salary is 6lakh/year.
Iam planning to invest in
PPF-Rs.40,000
ELSS-Rs.40,000 (Axis long term equity fund-Direct Plan(G) )
BALANCE FUNDS-Rs.40,000 (Tata Balanced Fund-Direct Plan(G) ) or (SBI Magnum Balanced Fund-Direct Plan(G))
These is my portfolio of investment.As Iam on my 1st job please suggest me whether Iam on right path or not.
I have read almost all of your articles and I am planning to opt for these Direct Plan(G) is it good or not.
Also suggest me regarding how can I save more on my tax as i have crossed my 1.5 lakh limit.
I am having 1 lakh in my hand and i want to save it for (1.5-2.5 years) please suggest me some best alternative in terms of good returns and tax benefiting.
Thank You so much, waiting for your input……………….
Dear Kamlesh,
Kindly provide more details ; your age/do you have dependents?/do you have health insurance?
Read:
List of best investment options.
List of income tax deductions for FY 2015-16
Dude, It seems have a lot of knowledge on investments. Request you to help me in investing small amounts of money.
I am a 25 yrs male working with roughly 28k/month. I can invest 5k per month.
So what do you suggest where should i invest. SIP? Some Policy?
In SIP which fund would be good and if some policy then please name them.
Regards,
Rishabh
Dear Rishabh,
Do you have any family member(s) who are financially dependent on you?
Do you have health insurance cover?
Also read:
Best Equity mutual funds 2016.
I am getting retirement in 2017,total 75-85 lakhs I am expecting after retirement.Kindlysuggest me the different schemes for Invest ment so that a Fixed income of Rs.30,000/-Per Month ,I will get to maintain my family.
Dear SUTAPA,
Besides the periodic income, what other financial goal(s) or obligations do you have.
Let me know if you have any family member(s) who are dependent on you financially. Do you have any other existing investments?
Do you have adequate health insurance cover ?
If returns are not guaranteed on debt funds, why are they called fixed income funds?
Dear Kumar..because they invest in fixed income securities.
hello,
tks for the article. i wish to invest 18 lakhs and generate Rs 10,000/- monthly. Which is the best option to preserve the capital and ensure the monthly returns of Rs 10,000 /-. my risk profile is moderate.
thanks for the articles. very informative.
Dear S J R..May I know the tenure (duration) of this investment?
Kindly read : MF MIPs.
Hi Sreekanth,
Thanks for wonderful article. After reading this article, I got this idea of doing SIP in a liquid or ultra short term fund for creation of emergency fund. My target is 3 lakhs of which I have currently accumulated 1.3 lakhs, lying in YES bank savings account (6% p.a). I am planning for 10000 per month as SIP amount. Please share your thoughts on the same.
Thanks,
Sudhakar S
Dear Sudhakar,
Do not have entire Emergency fund in liquid funds.
You may keep a portion of it in Savings account and the remaining amount in Liquid or ultra short term plan(s).
sir, i am 80 years old.i want to invest in mutual fund, or equity shares cash. at present my aim is to get minimum 10% tax free return. i am prepare to take 10% risk. some people say invest in balanced fund monthly dividend option like tata balanced fund or icici balanced advantage fund monthly dividend option.they say this will give tax free dividend and capital growth,. my feeling is instead of going for monthly dividend I can go Direct growth option which may nore return. tax implication is tax free if it is more than one year.now i have parked tata treasury manager fund direct growth option and icici flexible income Direct growth.if investing in balanced funds (will fetch better tax free return )is better can i go far this balanced fund. in your experience which fund which balanced better and why.kindly guide me and oblige.
with kind regards,
natarajan
Dear Natarajan Ji,
When you say ‘10% risk’, may I know what exactly do you mean by that?
Balanced Funds (Direct Growth Plans) are better. But let me know your investment objective and time-horizon?? When do you need the accumulated money? Do you have any specific financial goal?
sir, i think tds is not deducted in bank RDs.kindly verify.
with regards
narajan
Dear Natarajan..W.E.F FY 2015-16, TDS on RDs is applicable. Kindly read my article : TDS on RDs & Budget 2015.
my age 36 i need months income plan for 20 yrs i have fund saving a/c 10 lakhs amount my months expenses 10,000 p/m which plan ,months income in my bank a/c credit which choice benefit
1.post office MIS
2.Pension plan
3. Mutul fund Months income plan
4.etc
but guarantee return my credit
Dear feroz,
I did not understand your query.
Is it that you need guaranteed return / periodic income every month now?
Or you would like to invest in a scheme which gives periodic income after 20 years?