Evaluate a Debt Fund?

#1
Right... so with the solemn intention of better asset allocation, I thought of investing (in a staggered way) some percentage of my savings in Debt funds. Until now, I had never even tried to check what are the options available to us. But since the past week, I have come across so many Debt funds that I am not able to decide which one to pick!!

My question to the seasoned campaigners is: How do you select a debt fund? What are the parameters to look for?

I read a bit on Value Research Online and was wondering if I should just pick one depending on their ratings, which I usually don't do unless I have done due diligence.

Also, have any of you invested in debt funds? If so, which ones .. and are you happy with the investments?

This is for long term horizon (beyond 5 years).
 
#2
any updates?

Specifically, needed views on the following two funds:

1. ICICI Pru Income Plan (G)
2. Birla Sun Life Dynamic Bond Retail (G)

Thanks.
 

vasa1

Well-known member
#3
Jatan, there's not much to be said about debt funds!

There are two components to the returns.

One is the interest that the debt instrument carries. This will remain unchanged. In the case of a deep discount bond, such bonds are issued at a discount to the face value and the issue of interest does not arise directly.​
The other is the mark-to-market value of the instrument which is affected by prevailing interest rates and the market's perception of future interest rate movements. An up move will see a decrease in the MTM value and vice versa.​
Aggressive debt funds have a higher percentage of long term paper. Conservative and short-term funds have short term paper. The former are more volatile with the MTM values rising more in a falling interest rate regime and falling more in a rising interest rate scenario. The latter aren't affected much.

Entry into long term funds is advisable if one plans to hold for a long while, ideally one gets in when interest rates are peaking and gets out when they are bottoming.

Dynamic funds are supposed to gauge the interest rate movements and balance the portfolio accordingly. Here the investor is supposedly relieved of making the invest/redeem decision.

Floating rate funds are supposed to buy paper that has the interest rates tied to an interest rate benchmark. Whether such paper is abundant or not nowadays, I do not know.

Personally, most of my money is in the ICICI Prudential Short term Plan (Growth option) and less is in the ICICI Prudential Income Plan (Growth option). I'm holding both for several years even though the former is recommended for a few months only :D.

I would suggest you stick with the main fund houses such as Birla, ICICI Prudential, or Templeton which have long track records. I'm not sure that there's much "diligence" to be done here.
 
#4
Vasa... as usual quite informative. Clears the air quiet a bit. ICICI Pru Income plan was on my radar, but will also check the short term plan as well as the BSL Dynamic Bond and make a decision eventually. Will post it on here once I buy it :)
 

Alchemist

Administrator
Staff member
#5
This may not be a good time to invest in debt funds.

Bond prices move in opposite direction to interest rates.

If interest rates move up from current levels, debt funds may give poor returns.

"It seems like rates are going to tighten soon and long-term bond yields are likely to go up. If you are holding medium-to-long-term debt, you are likely to face losses,’’ he adds. ‘‘The advice is based on expectations of a interest rate hike. If the rates go up, debt schemes may give negative returns,’’ says Mukesh Dedhia, director, Ghalla & Bhansali Securities. ‘‘If you put money in a fixed deposit or similar avenue, you are at least assured of a fixed interest on maturity,’’ he adds.
Source: Fixed deposits back in limelight.
 

Alchemist

Administrator
Staff member
#7
One more thing I would like to add.

most investors know that mutual funds that invest more in high-beta stocks usually outperform the Nifty/Sensex in a bull market and underperform in a bear market.

something similar happens in debt mutual funds too.

the price sensitivity of a bond to interest rate changes depends on a few different factors.

=======================

e.g. longer-term bonds are more sensitive to interest rate fluctuations.

a scheme ABC which has most of its corpus invested in longer-term bonds is likely to outperform a scheme XYZ with more of short-term bonds, when rates fall.

the same scheme ABC is likely to underperform the scheme XYZ when rates start to go up again.

=======================

thus, looking at the past-performance of a mutual fund scheme shouldn't be the only criterion for investing in it.
 

Alchemist

Administrator
Staff member
#9
this article (written in February 2009) is in favor of investing in term deposits and money market funds for short-to-medium term.

http://www.thehindubusinessline.com/iw/2009/02/15/stories/2009021550430900.htm

The sensitivity of bonds to interest rate changes vary with maturity. A long-term bond (maturity of more than 10 years) will be more sensitive to interest rate changes than a short-term bond (maturity between one and five years).

It logically follows from the inverse price-yield relationship that investors who expect interest rates to go up, should hold funds that invest in short-term bonds, for such bonds carry low interest rate risk. And investors who expect interest rates to decline should hold funds that carry long-term bonds, for such bonds will generate higher returns.
It is important to understand that term deposit and money market funds are optimal choices when the investment objective is to enhance cash returns till interest rates move up. The advantage is that an investor need not worry about price risk at redemption, as she has to in the case of bond funds.
 

Alchemist

Administrator
Staff member
#13
Since many of us were expecting / fearing an upmove, talk is on of the reverse :D.

"‘We expect a gradual decline in gilt yields'"
And perhaps to underline the futility of beginners / outsiders trying to outguess the debt market, we have this:

Bond yields may continue upward movement
Even if rates go down for current levels, there will be limited downside.... at most 50 or 100 basis points.

The extent by which rates can go up from current levels is much more than the extent by which rates can go down.

and then inflation is always something that RBI has to worry about.

India's wholesale prices rose faster than expected in November, and analysts said inflation worries could prompt the central bank to tighten banks' reserve requirements in coming weeks and raise rates early next year.
http://in.reuters.com/article/companyNews/idINSGE5BE01W20091215
 

Alchemist

Administrator
Staff member
#15
Here are 5 that I am interested in:

Birla Sun Life Dynamic Bond
Canara Robeco Income
Birla Sun Life Floating Rate Long Term
HDFC Floating Rate Income Long Term
HDFC High Interest Short-term

Any comments?
 
#16
Birla Sun Life Dynamic Bond is highly rated by Value Research Online and I am also thinking of investing in it. Until recently, its highest holding was HDFC Debentures, but recently it acquired GOI securities and it comprises 10% of the portfolio. Thus interest rate increase may impact this one.
 

Alchemist

Administrator
Staff member
#17
Birla Sun Life Dynamic Bond is highly rated by Value Research Online and I am also thinking of investing in it. Until recently, its highest holding was HDFC Debentures, but recently it acquired GOI securities and it comprises 10% of the portfolio. Thus interest rate increase may impact this one.
I guess all schemes have some exposure to GOI bonds.

Any other mutual fund scheme that you can suggest with minimal exposure to long-term bonds, but more into debentures, certificates of deposits etc?
 

vasa1

Well-known member
#18
Birla Sun Life Dynamic Bond is highly rated by Value Research Online and I am also thinking of investing in it. Until recently, its highest holding was HDFC Debentures, but recently it acquired GOI securities and it comprises 10% of the portfolio. Thus interest rate increase may impact this one.
Jatan, if you really want to go deep, you will have to look at the tenure of the securities to find out / guess the impact of interest rate hikes.
 
#19
Birla Sun Life Dynamic Bond Fund - Retail Plan (MD)
Birla Sun Life Dynamic Bond Fund - Retail Plan (QD)
I just checked both and found that one shows -ve return and one about 3 %..

Btw what (MD) and (QD) stand for ? I normally heard dividend and growth instead?

And if you look at the yearly chart it shows a straight line which means that it has no growth as like other funds. If so why it is four stars rated?

rgds,
Reks
 
#20
Jatan, if you really want to go deep, you will have to look at the tenure of the securities to find out / guess the impact of interest rate hikes.
Yup.. right. The the one invested in by BSL Dynamic Bond matures in 2016. Would that be considered long term, and hence have a higher impact?
 
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