News APP

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  gplay

Rediff.com  » Getahead » 8 Debt Fund Investing Myths Busted

8 Debt Fund Investing Myths Busted

By P V SUBRAMANYAM
May 29, 2024 09:34 IST
Get Rediff News in your Inbox:

P V Subramanyam clears some misconceptions about debt funds.

Illustration: Dominic Xavier/Rediff.com
 

Even though debt funds are the biggest contributors to the mutual fund corpus in India, there is surprisingly not much literature on debt funds.

1. Debt mutual funds are EXACTLY like bonds

Debt funds and bonds are very different. If you can lock in today into a PSU bond at 9 per cent current yield for a 20 year period, it is an amazing saving instrument.

I daresay no fund scheme can give such a good return over such a long period. If they had zero coupon and fully back ended interest, I would have been happier, but this is a brilliant product.

2. Debt fund is only for the retired person

Not true at all. Even when you are younger, say 45 a debt fund makes sense. Invest in a longer duration fund and redeem only when you retire.

3. Debt funds carry NO RISK, especially gilt funds

Debt funds carry two types of risks (like any debt product) -- one is the risk of default (on a part of the portfolio, not the full portfolio) and interest rate risk.

When interest rates go up, the value of your bond fund will go down and the reverse is also true. So depending on YOUR time horizon you should choose your funds.

This means you can LOSE money EVEN in government guaranteed ‘gilt’ fund. However you can NEVER EVER lose money in a NOMINAL sense in gilts bought and held to maturity.

4. All debt funds are the same!

Sorry, no. If you have money for the short term -- say three days or you are accumulating money for your retirement about 30 years away you will have to choose DIFFERENT PRODUCTS.

For a short duration you need to choose funds with low duration (like liquid fund) whereas for a long term requirement you will choose an income fund or a gilt fund.

Your choice will depend on:

  • Your own outlook about the time you wish to hold the fund scheme
  • How much fluctuation you can stomach
  • At what point of the interest rate curve we are sitting at

5. Indians invest very heavily in debt funds

Partially true, and partially false. Indians invest in bank debts and sometimes even in post offices and LIC policies. However most of the money you see in the mutual funds is the corporate monies. These are parked in liquid funds, fixed maturity plans, etc.

6. Debt funds are cheap

Not true at all. You need to be careful about debt fund costs.

7. Debt funds are useless; one should stick to bank fixed deposits, especially for older people

Wrong. Debt funds are the ONLY way you could consider deferring the tax on debt investments. If you had a bank fixed deposit you would pay tax on interest earned on a regular basis. You could convert this to a capital gain by investing in growth option.

8. It is easy to build a debt fund portfolio

Wow!! It is far more difficult to build a dynamic bond portfolio -- and the Indian market does not have enough bonds on tap -- so building a debt portfolio is also ALMOST a nightmare!

  • Money-related questions? Ask rediffGURUS HERE.

P V Subramanyam is a chartered accountant with more than four decades of experience in the field of personal finance and blogs at subramoney.com.


Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Get Rediff News in your Inbox:
P V SUBRAMANYAM
COMMENT
Print this article
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news