Thursday, December 22, 2016

FUND FULCRUM
December 2016

Mutual fund industry's asset base surged to an all-time high of Rs 16.5 lakh crore at the end of November 2016, aided by strong inflows in income and equity segments as a result of buoyant investor sentiment. Comprising 43 active players, the industry had assets under management (AUM) of over Rs 16.28 lakh crore at the end of October 2016. Overall inflows in mutual fund schemes stood at Rs 36,021 crore at the end of November 2016 compared to Rs 32,334 crore at the end of October 2016. Income funds, which invest in government securities, saw an inflow of Rs 18,306 crore, while equity and equity-linked saving schemes witnessed an infusion of Rs 9,079 crore. Balanced funds, which invest in equity and debt instruments, saw an inflow of Rs 3,632 crore. However, Gold exchange traded funds (ETFs) witnessed a pull out of Rs 69 crore during the period under review.

Piquant Parade

FundsIndia, an online advisory MF portal has launched their own research-driven, in-house funds rating service – FundsIndia ratings (FI ratings). With this launch, FundsIndia claims to become the first investment service provider to rate and analyze mutual funds. Currently, the portal has their own basket of researched funds called as FundsIndia Select Funds. With FundsIndia ratings, investors would not only have access to Select Funds, but also get an idea of where their other current holdings stand, in relation to category peers.

MF Utiity has launched e-CAN (Common Account Number) facility which allows distributors and investors to open a CAN online for individual investors. Since launch, more than 72,000 CAN requests have been processed on MFU. The  average AUM as on October 31, 2016 held by the CAN holders is close to 45,000 crore. Currently, on an average more than 300 CAN requests are received each day. With the convenience offered by eCAN, this number is expected to grow substantially. Until now, to open a CAN, investors had to submit a signed physical form with necessary attachments. With the launch of e-CAN, investors and their advisors can open a CAN with the help of a single form and single payment for initiating multiple transactions. Here’s how your clients can open an e-CAN. Investors have to fill the CAN registration data online on MFU website and submit electronically. The supporting proof documents can also be submitted electronically, by using an upload link. The CAN number is allotted instantly. eCAN is also available in the form of API, to enable distributors to facilitate creation of CAN for their clients online. New investors can also make use of the eCAN option to fill and submit the CAN registration data online to get the CAN number allotted instantly and later submit a signed CAN form with necessary documents to their intermediaries or at any of the MFU Point of Service (POS).

BSE has started levying transaction fee on its BSE Star MF platform. The transaction fee is applicable from December 1, 2016. This cost will be borne by AMCs. “In order to cover the costs of operations, all participating Mutual Funds/AMCs are hereby informed that transaction charges shall be levied on all orders being routed through the BSE Star MF platform”, states the circular issued on November 30, 2016. BSE Star MF is a browser based automated online order collection system which can be accessed through web from anywhere. Distributors can initiate a number of transactions like invest, redeem and start a SIP through this platform on behalf of their clients. BSE StAR MF has around 2400 registered distributors using this platform.

Investing in mutual funds through SIP without any upper limit just got simpler and faster. BSE StAR MF has launched paperless SIP service called ISIP through which IFAs can initiate SIPs on behalf of their clients without submitting any form and NACH mandate. This new facility can be activated through a net banking platform or mobile application. Distributors will have to generate Unique Registration Number (URN) from the platform for their investors. Investors will then be required to key in this number in the add biller option on their net banking or mobile application. This facility is available in most of the large banks. Typically, banks take three days to activate this facility. Currently, registering a SIP through NACH mandate takes up to 10 days.  In addition, distributors can register multiple SIPs through one mandate. This is a cost effective and paperless way to initiate SIP. To start with, BSE has enabled this facility for four fund houses – Mirae, ICICI Prudential, Tata, and Quantum. The platform will extend this service to other fund houses soon. Further, BSE has said that they are ready with the infrastructure of accepting payments through e-wallets like Paytm, FreeCharge, and Mobikwik. This service would be operational once it gets a nod from SEBI.

Regulatory Rigmarole

In order to give a fillip to startups, SEBI has relaxed investment norms for Angel Funds. The minimum ticket size of Angel Funds has been slashed from Rs.50 lakh to Rs.25 lakh. Angel Fund is a sub-category of Venture Capital Funds under AIF Category I. As the name suggests, such funds can raise capital from angel investors who invest in startups to support them during initial days. Earlier in March 2015, SEBI had constituted a committee headed by NR Narayana Murthy, co-founder of Infosys, to suggest measures to boost the startup ecosystem in India and develop the AIF industry. Based on the recommendations of the committee, SEBI has made amendments in the AIF regulations. Here are some of the key amendments in AIF regulations introduced by SEBI:
·         Maximum number of angel investors has been increased from 49 to 200
·         Lock in period of three years has been slashed to 1 year
·         Angel Funds will now be allowed to invest in startups incorporated within five years. Earlier, it was three years.
·         Angel Funds are allowed to invest in overseas venture capital undertakings up to 25% of their investible corpus in line with other AIFs.


Total wealth held by individuals in India grew by 8.5% to Rs.304 lakh crore in FY16, and is expected to grow to Rs.558 lakh crore over the next five years. That projection, which translates into a compounded annual growth rate of 12.9% over the next five years, is the assessment of the wealth management arm of financial services firm Karvy, as presented in its seventh India Wealth Report. The total individual wealth in financial assets grew by only 7.14% to Rs.172 lakh crore in FY16, much slower than in FY15, when wealth grew nearly 19%. The relatively poor performance of direct equities may account for this. However, Karvy predicts that financial assets will grow at a faster pace of 14.73% CAGR, nearly doubling in five years. Individual wealth in physical assets stood at Rs.132 lakh crore, a 10.32% growth in FY16 against a 2% decline in FY15. Individual wealth in gold stands at Rs.65.90 lakh crore, whereas wealth in real estate (excluding primary residences), comes in second at Rs.55.47 lakh crore. The report noted that India is “considered the bright spot among emerging economies.” However, it said that the economy is bound to slow a bit in the short term, given the government’s recent efforts to demonetise old, high-value notes. However, in the long run, India is expected to outshine its emerging market peers, including China, owing to changing positive dynamics, especially the government’s reforms push (the Goods & Services Tax (GST), Real Estate (Regulation and Development) Act, and the Bankruptcy Code, among others.

Monday, December 19, 2016

NFO NEST
December 2016

Equity NFOs reduced to one-third in 2016


After two consecutive years of high number of new fund offers (NFOs) in the equity segment, India's mutual fund industry has seen a substantial decline in new launches. With stricter norms on the commission structure, rising preferences among investors for existing funds with a performance of track record, regulator's tough stance on merger of similar schemes, and more importantly a lack of a strong stock market rally put together have taken a toll on new offerings.

ICICI Prudential Capital Protection Oriented Fund – Series XI Plan B

Opens: December 6, 2016

Closes: December 20, 2016


ICICI Prudential Mutual Fund has launched the ICICI Prudential Capital Protection Oriented Fund-Series XI-Plan B 1222 Days, a close ended income fund. The investment objective of the fund is to protect capital by investing a portion of the portfolio in highest rated debt securities and money market instruments and also to provide capital appreciation by investing the balance in equity and equity related securities. The debt securities would mature on or before the maturity of the fund. The fund’s performance will be benchmarked against CRISIL Composite Bond Fund Index (85%) and Nifty 50 Index (15%) and its fund managers are Vinay Sharma, Rahul Goswami, Chandni Gupta, and Ihab Dalwai.

SBI Dual Advantage Fund – Series XVIII

Opens: December 7, 2016

Closes: December 21, 2016


SBI Mutual Fund has unveiled a new fund named as SBI Dual Advantage Fund - Series XVIII, a close ended hybrid fund. The tenure of the fund is 1211 days from the date of allotment. The primary investment objective of the fund is to generate income by investing in a portfolio of fixed income securities maturing on or before the maturity of the fund. The secondary objective is to generate capital appreciation by investing a portion of the fund corpus in equity and equity related instruments. The fund will invest 55%-95% of assets in debt and debt related instruments, invest upto 10% of assets in money market instruments with low to medium risk profile, and invest 5%-35% of assets in equity and equity related instruments including derivatives with high risk profile. Benchmark Index for the fund is CRISIL MIP Blended Fund Index. Rajeev Radhakrishnan shall manage debt portion and Ruchit Mehta shall manage investments in equity and equity related instruments of the fund.

Sundaram Select Micro cap Fund – Series 11

Opens: December 8, 2016

Closes: December 22, 2016


Sundaram Mutual Fund has launched a new fund named as Sundaram Select Micro cap Fund - Series 11, a close ended equity fund. The tenure of the fund is 4 years from the date of allotment of units. The investment objective of the fund is to provide capital appreciation by investing primarily in equity and equity related securities of companies that can be termed as microcaps. A company whose market capitalisation is equal to or lower than that of the 301st stock by market cap on the NSE at the time of investment will be considered to be in micro-cap category. Benchmark Index for the fund is S&P BSE Small Cap Index. The fund managers will be S. Krishna Kumar and Dwijendra Srivastava.

BNP Paribas Enhanced Arbitraged Fund

Opens: December 8, 2016

Closes: December 22, 2016


BNP Paribas Mutual Fund has launched the BNP Paribas Enhanced Arbitrage Fund, an open ended growth fund. The investment objective of the fund is to generate income and capital appreciation by investing in a combination of diversified portfolio of equity and equity related instruments, including use of equity derivatives strategies and arbitrage opportunities with exposure in debt and fixed income instruments. The fund will invest a minimum of 90% in equities, equity related instruments and derivatives and a minimum of 10% in debt securities and money market instruments with maturity of up to 91 days. The fund’s performance will be benchmarked against CRISIL Liquid Fund Index and its fund managers are Karthikraj Lakshmanan and Mayank Prakash.

Axis Emerging Opportunities Fund – Series 1

Opens: December 9 , 2016

Closes: December 23, 2016


Axis Mutual Fund has launched the Axis Emerging Opportunities Fund-Series 1 (1400 Days), a close ended growth fund. The investment objective of the fund is to generate long term capital appreciation by investing in a diversified portfolio of equity and equity related instruments of midcap companies. The fund’s performance will be benchmarked against S&P BSE Midcap Index and its fund managers are Jinesh Gopani and Anupam Tiwari.

IDFC Balanced Fund  

Opens: December 12 , 2016

Closes: December 26, 2016


IDFC Mutual Fund has launched a new fund named as IDFC Balanced Fund, an open ended balanced fund. The investment objective of the fund is to generate long term capital appreciation and current income from a portfolio that is invested in equity and equity related securities as well as in fixed income securities. The fund will allocate 30% to 60% of assets in equity and equity related instruments, invest 5%-35% of assets in Net Equity Arbitrage Exposure with medium to high risk profile, and invest 35% - 60% of assets in debt securities and money market instruments with low to medium risk profile. Benchmark Index for the fund is CRISIL Balanced Fund Index. The fund managers are Punam Sharma (equity portion) & Anurag Mittal (debt portion).

Reliance CPSE ETF, Sundaram Arbitrage Fund, Axis Corporate Debt Opportunities Fund, and IDFC BFSI Fund are expected to be launched in the coming months. 

Monday, December 12, 2016

GEMGAZE
December 2016 

Average investors need a balanced investment portfolio in order to earn reasonable returns at an acceptable level of risk. This is achieved by investing money in debt funds besides diversified equity funds.

All the GEMs from the 2015 GEMGAZE but two have exhibited a dismal performance and have been shown the exit door in the 2016 GEMGAZE. Birla Sun Life Dynamic Bond Fund and Birla Sun Life Floating Rate Short-term Fund have retained their esteemed status as GEM.

Birla Sun Life Treasury Optimizer Fund Gem
Birla Sun Life Treasury Optimizer Fund was launched nearly a decade ago in 2008. The current AUM of the fund is Rs. 9,048 crore. Its return in the past one year is 12.97%, almost on par with the category average of 12.35%. The number of holdings in the fund’s portfolio is 130 with an average yield to maturity at 7.56%. The expense ratio of the fund is fairly low at 0.65%. The fund is benchmarked against the CRISIL Short-term Bond Index. The fund is managed by Mr. Kastubh Gupta since September 2009.

Birla Sunlife Dynamic Bond Fund Gem
Birla Sunlife Dynamic Bond Fund manages assets worth Rs. 15,568 crore, making it the largest fund in the income category. This fund is a steady top quartile performer with low volatility. It has delivered returns across interest-rate cycles and is among the top few in its category. The one-year return of the fund is 16.02% as against the category average of 14.15%. A veteran in the dynamic-bond-fund category, this ten-year-old fund has the distinction of beating both its benchmark and the category consistently over three interest-rate cycles. The fund does not rely on duration calls alone for alpha and uses a mix of G-secs and corporate bonds to take advantage of rate movements. The fund's track record shows that it has beaten its benchmark and category by a convincing 1.40 percentage points annually over 10 years and by over 1 percentage point in five and seven years. Returns in the last one year have been slightly below the benchmark, given a more conservative portfolio positioning. But it has managed this with good risk control, given that its worst one-year returns, at 3.3%, have not slumped into the negative territory like some of its peers. In recent months, the fund has stretched its maturity with the view that further transmission of recent rate cuts will bolster bond prices. Though the fund has taken credit calls in the past, it has reduced exposure to lower-rated corporate debt in the last one year. In May 2015, the fund had a 59% exposure to G-secs and 15% to AAA corporate bonds, with a 20% plus exposure to bonds that were AA-rated and below. But by March 2016, G-sec and AAA exposures had been pegged up to over 86% of assets and AA exposures trimmed to just 6%. The number of holdings in the fund’s portfolio is 55 with an average yield to maturity at 8.15%. The expense ratio is 1.5%. The fund has 58 holdings with the yield to maturity of 7.8%. The fund is benchmarked against the CRISIL Short-term Bond Index.  Maneesh Dangi is the fund manager since September 2007.

SBI Magnum Gilt Fund - Long term Plan Gem 
Launched in December 2000, the fund has an AUM of Rs 2,205 crore. The one-year return of the fund is 16.93% as against the category average of 16.50%. The fund has outperformed its benchmark over one-, three- and five-year timeframes. It has delivered a compounded annual return of 11.5% over the last three years. The fund is benchmarked against the I-Sec Li-Bex. The fund has seven holdings with the yield to maturity of 7.02%. The expense ratio of the fund is 0.97%. Dinesh Ahuja has been the fund manager since January 2011.

Birla Sunlife Floating Rate Short term Fund Gem

This relatively young fund, launched in October 2005, boasts of a massive AUM of Rs 4950 crore.  In the past one year, this liquid fund has returned 7.82% as against the category average of 7.58%. The number of holdings in the fund’s portfolio is 42 with an average yield to maturity at 7.04%. The expense ratio is a mere 0.27%. The fund is benchmarked against the CRISIL Liquid Index. Sunaina da Cunha and Kaustubh Gupta are the fund managers.

Monday, December 05, 2016

FUND FLAVOUR
December 2016
As a community, investors have traditionally harboured misguided notions about debt mutual funds. Some consider them to be fixed interest bearing securities, whereas others understand gilt funds to be low risk, as they invest in sovereign bonds. Although it is true that debt funds are less volatile and have a lower risk than equity funds, it is vital for mutual fund investors to have a basic understanding of how they work, and especially the risks involved. With interest rates in traditional instruments falling in line with declining interest rates (PPF rates have been dropped to 8.1%, SCSS to 8.6%, and PPF to 8.1%), risk-averse investors need to necessarily consider debt mutual funds in order to continue beating inflation while avoiding risks.

An integral part of the portfolio

Debt funds should form an integral part of any investment portfolio for two major reasons: One for stable returns, and two, to spread across risks so that there is a cushion when rates fall and equities tank. In addition to equities, prudent fund managers often shuffle portfolios across varying maturities in debt, depending upon market conditions. Today, in the Indian context, interest rates are seen downward in the longer time frame, though near-term could be steady to firmer. There are, however, inherent risks involved if two facts – volatility and time frame – are not taken into consideration.

Volatility: It is a factor that leads to a sharp rise or fall in the prices of debt instruments when interest rates dip or rise respectively. Interest rates and bond prices are inversely proportional, meaning if interest rates drop, bond prices soar, and the reverse occurs when interest rates rise.

Time frame: It is the period for which funds are parked or invested. One can even invest in debt for a period ranging between a day and as long as 30 years. Broadly speaking, investment options in debt can be divided into short, medium or accrual, and long-term debt funds.
Short-term funds: These are liquid funds where one can earn returns of 200-250 basis points above the savings bank rates of 4-6%. Liquid funds, as the name suggests, are as good as any saving account, the only difference being one would perhaps need a day or two for the funds to come into the kitty. It has been often observed that many savers let funds idle in bank savings as a protection for future eventuality or emergency, little knowing that liquid funds offer the same benefit and even earn a higher rate than savings. The instruments in which such funds invest are short-term government papers like treasury bills and other money market instruments of shorter maturities of three months or less. There are cases where smart investors park their salaries in such instruments till their regular outflows like SIPs, home loan installments, insurance premiums, etc., begin. For example, if your home loan EMIs are slated for the tenth of every month and the salary is credited to the account on the first of every month, by parking the same funds in liquid funds, you stand to enhance your interest accruals by at least 200 basis points for that nine-day period instead of the 4-6% earned in a savings account.
Medium term/accrual schemes: These schemes typically invest in government bonds and corporate bonds while maintaining the average maturity of around 3-5 years. The corporate bonds in this case need not necessarily be AAA rated bonds, but a notch or two lower as they offer higher returns to the fund. The view of the investor, on the other hand, is one of a shorter duration. Three years or more is recommended for tax exemptions and typically syncs with the investors' need for future requirements. The reason why fund managers recommend investments with a duration of three years and above is that the returns are as good as tax-free. Such funds are also called accrual funds. These funds maintain a higher yield to maturity (YTM) through exposure to sub-AAA assets while AAA assets of 5-10 year maturity are taken as a hedge to provide the benefit of price appreciation should interest rates fall. Higher the accruals, lower will the corporate bond maturities be, and therefore, lower the interest rate risk. For example, if the interest rate view of a fund manager is that of a softening trend, in such a case, besides earning the interest rates or coupon on the bonds, the portfolio would appreciate if the view holds good. However, if the view held turns wrong, which is, the rates firm up, prices of underlying securities begin to slide. This is when fund managers recommend systematic transfers to average out the costs of the underlying.
Long-term investments: The longer the duration, the more will be the volatility in the near-term, but returns get adjusted with time if rates are stable or easing. In such a case, the key driver of returns is the fluctuation in interest rates. Given that macroeconomic fundamentals and long-term interest rates are poised downward, long-term investors stand to gain from price appreciation of the underlying securities. However, there could be intermittent blips where the returns could be lower.

To get debt funds’ mix right…

Though debt funds are relatively less risky than equity funds, interest rate movement can create volatility in short term. While equity funds have the ability to generate blockbuster returns in bullish times but may turn volatile in bearish markets, debt funds can help generate relatively more stable steady returns in good and bad times given that underlying portfolio in a debt funds consists of instruments which have generated some yield at all times. The terminology and names used to define different types of debt funds can be confusing to a layman. This might even lead to investors shunning debt funds. For any investor, therefore, it is important to get the mix right.

…solve the jigsaw puzzle

Getting the mix right is a bit like a jigsaw puzzle. Once you have the pieces come together, the full picture emerges and this gives clarity on how the portfolio is shaping up. The four pieces in this jigsaw when it comes to debt funds is investment horizon, risk appetite, level of diversification (scheme and AMC level), and return expectation.

Investment horizon
Typically an investor should break up his investible surplus into that which could likely be redeemed within one year (short-term) and those which can be kept for longer tenors (more than 1 year). Those investments which are meant for short term should be invested in debt funds which ideally do not have exit load and have low maturity and hence would be subject to low short-term volatility (due to movement in interest rates). Two typical types of debt schemes which fall in this category are liquid funds and ultra-short term schemes. Investors should also keep in mind the tax applicability so as not to be hit adversely by short-term capital gains in the event of exit less than three years in debt funds. Hence taxation would also be a key determinant of investment horizon. Here a comparison between liquid/ultra-short term debt funds and arbitrage funds (equity) would be worthwhile as arbitrage funds enjoy favourable tax treatment. Tax treatments for various types of mutual funds do undergo changes during the presentation of Union Budget, so one should be updated about investments done post Budget especially in the new financial year before making fresh allocations.

Risk appetite
Although debt funds are relatively less risky than equity funds, however, interest rate movements can create volatility in the short end. We call this interest rate risk. This risk is measured typically a measure called modified duration. Every debt scheme portfolio would have a modified duration which is a weighted average of the modified duration of individual debt instruments in its portfolio. Schemes with higher modified duration can generate high returns in bullish times (when interest rates head lower and prices rise) but also give low returns in bearish times. Also, different types of debt instruments carry different yield based on credit of the issuer. For example, a 10-year sovereign government bond would today yield 7.75% annualised yield. A 3-year AA rated NBFC bond could yield 9%. We call this credit risk. So credit funds or high-yield debt funds which invest in relatively lower rated papers carry higher credit risk but can also generate higher returns. While individual debt instruments also have varying levels of liquidity risk, for the investor this should not be much of a concern as mutual fund open-ended debt schemes typically offer daily liquidity. So investor can redeem money any day. The only exception to this rule is FMPs (Fixed Maturity Plans) or capital protection oriented schemes or other hybrid debt-oriented close-ended schemes. There should be therefore a balanced allocation to short-term and long-term debt funds and credit or high yield/accrual bond funds depending on one’s risk appetite.

Level of diversification
How many debt schemes and how many AMCs does one need to have in one’s portfolio? Not too little and not too much! There is no one golden number or rule. It depends entirely on each individual investor and how well you can manage and juggle your investments.

Return expectation
It is important to have expectations of realistic returns and be ready for disappointments. It is quite possible that even after figuring out the above three factors, some debt schemes at some point in time could underperform or disappoint you in terms of returns being offered. A practical approach would be to take a decision on whether to continue to investment or redeem and put the money to work elsewhere. For this you need to differentiate on whether the underperformance is due to fund manager level issues or market-related issues. If the former, one may need to switch the AMC and if the latter, one need to move into a different type of debt scheme or wait out. If the above is bogging you down, think of taking help of a distributor or adviser. Advisers who work on a fee basis and invest your funds in direct plans rather than those who do not take a fee but invest your funds in regular plans would be a better option. Also active monitoring of your investments on a periodic basis is a must to take a mid-course correction if required.

If you manage to put the pieces of the jigsaw puzzle together, it would ensure your money is put to work really hard and you are on course to meet your investment and saving targets.

Debt fund performance with promises of a better future

If you have any financial goal(s) which is less than five 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 definitely consider investing in debt mutual funds. The returns from debt funds are mainly dependent on the interest rate scenario prevailing in the economy. Some of the debt mutual funds, especially dynamic bond funds, gilt funds, and long-term debt funds have given better returns than bank fixed deposits over the last one to two year period in view of the downward trend in interest rates. The average liquid fund category returns in the last three months and one year are 1.5% and 6.8% respectively. The ultra short-term debt funds, also known as liquid plus funds or cash/treasury management funds, as a category, have generated 2% and 7.9% in the last three months and one year respectively. Short-term funds, also known as short term credit opportunities fund, have returned 8.8% and 7.9% over the past one and three years respectively. The average returns generated by the funds which are in the dynamic and long-term income bond funds category are 9.2% and 8.8% during the last one and three years respectively. The average category returns of gilt funds for the last one, three, and five years are 10.08%, 9.4%, and 7.8% respectively.

Changing investment pattern: Debt funds to rule the future


The Indian mutual fund industry is almost Rs 16 lakh crore strong with fixed income or debt having a two-third share at about Rs 10 lakh crore, the rest being largely equity. The share of debt funds has not changed much from a decade ago when the industry size was less than Rs 2 lakh crore. Another characteristic which has not changed is the institutional dominance (mainly corporates and banks) of the category despite having grown by about 7 times since 2005. However, tax arbitrage and lower expenses for institutional plans now being history, the ratio is bound to shift towards retail investors over the next 5-10 years. But we still have a long way to go as RBI data indicates that about Rs 90 lakh crore is parked in bank deposits, 10 times the money in debt mutual funds and over 35 times the retail debt AUM. This is mainly due to lack of awareness about the benefits offered by debt funds besides the ‘assured returns’ psyche of retail investors. This is bound to change as overall interest rates are likely to fall as India grows. In fact, many investors already shop for higher interest rates by moving from nationalised to cooperative banks. Two factors stand out in favour of debt mutual funds — variety and convenience. In terms of variety, debt funds are available across horizons and risk appetites. Accordingly they can be broadly classified into short term and long term debt funds. For short term investment horizons one may choose between liquid funds (3-6 months), ultra short term debt funds (less than one year) and short term debt funds (less than 3 years). One may choose income and gilt funds if investment horizon is more than 3 years. On the basis of risk, one needs to look at interest rate risk and credit risk. The former is due to change in rates in the economy. This risk can be gauged by average tenure of portfolio holdings — longer the tenure, higher the interest rate risk. Accordingly, liquid funds carry the least interest rate risk while gilt funds carry the highest interest rate risk. In terms of credit risk (risk of default or delay in payment of interest and principal), gilt funds carry nil credit risk as they hold sovereign bonds. So why not invest in only sovereign bonds. Higher yields do matter to investors whether it is FDs or debt funds. Government bonds fetch yields of 7.44-7.77% over 1-10 year bonds. One therefore needs to invest in corporate bonds to beat these yields. But AAA bonds only offer about 0.45% more for 10-year bonds while this is about 2% if is an A+ rated bond. This clearly shows the inverse relation between credit rating and yields as highest rated companies borrow at lowest cost. Mutual funds thus invest in AAA, AA and A rated bonds, all of which are within investment grade rating of BBB(-). Last but not the least is convenience. Most mutual funds are highly liquid. One can even start a monthly systematic investment plan or SIP for as low as Rs.500 per month. The most pertinent question then is how to choose the right funds. The easier way out is to consult your professional financial advisor. Once you have zeroed on the debt fund category, narrow your choice by looking for a pedigreed fund house and fund management team besides looking at its vintage. If they have been around for 1 or 2 decades, it surely gives a lot of confidence having seen multiple market cycles.