Monday, December 31, 2018

December 2018

The asset under management (AUM) of the mutual fund industry rose by 13% to Rs 24 lakh crore in 2018 by the end of November itself, up from Rs 21.26 lakh crore at the end of December 2017, according to data available with the Association of Mutual Funds in India (AMFI). However, the final AUM figure at the end of December 2018 might be slightly lower than that of November 2018 as there could be a dip in liquid funds due to the quarter-end phenomenon. The industry's AUM had crossed the milestone of Rs 10 lakh crore for the first time in May 2014 and in a span of about four-and-a-half years, the asset base is up more than two-fold to Rs 24 lakh crore in November 2018. It had crossed the Rs 25 lakh crore mark also at the end of August 2018. The year 2018 would mark the sixth consecutive yearly rise in the industry AUM after a drop for two preceding years. Mutual funds have added a whopping Rs 3 lakh crore to their asset base in 2018 and the uptrend may continue in 2019, helped by consistent rise in the SIP flows and a strong participation of retail investors despite volatile markets. Moreover, a sharp rise in SIPs shows more people moving away from the concept of large lump-sum investments. Fund houses have garnered over Rs 80,600 crore through SIPs --a preferred route for retail investors to invest in mutual funds as it helps them reduce market timing risk. The industry added close to 10 lakh SIP accounts each month on an average in 2018 with SIP collection on a monthly basis increasing to over Rs 6,700 crore this year from more than Rs 4,950 crore in 2017. Another highlight of 2018 was a surge in the number of investor accounts and equity folios contributed tremendously to this growth. Overall, investor folios climbed by 1.32 crore to 8 crore while retail investor accounts -- defined by folios in equity, ELSS and balanced categories -- alone grew by 1.25 crore to 6.7 crore. Besides, equity and equity-linked saving schemes (ELSS) attracted an impressive inflow of Rs 1.15 lakh crore. The pace of growth, however, declined for the asset size in 2018 as compared to 2017. The industry had seen a surge of 32% in the AUM or an addition of over Rs 5.4 lakh crore in 2017. The IL&FS default and the consequent blow to the NBFC sector because of the credit crunch exposed mutual funds to lakhs of crore worth of ill-liquid debt funds. This coupled with volatile markets could be some of the reasons for a slower growth in assets base this year. The factors that will drive the growth in 2019 include the untapped potential, rising investor awareness about mutual funds as an investment alternative and a spirited promotion campaign by AMFI.

Regulatory Rigmarole

Markets regulator SEBI has issued new norms to cap total expenses for investment in mutual funds at 2.25%. The regulator has capped the maximum TER for closed-ended equity schemes at 1.25%, and other than equity schemes at 1%. The maximum TER for open-ended equity schemes will be 2.25% and 2% for other open-ended schemes. With regard to open-ended equity schemes, SEBI said that the highest expense ratio allowed to be charged for the first Rs 500 crore of assets will be 2.25%. As AUM increases, the expense ratio will have to come down. For the next Rs 250 crore, it will be 2%; for further Rs 1,250 crore, it will be 1.75%; for the next Rs 3,000 crore, the fee will be 1.6%; and again on the next Rs 5,000 crore of the daily net assets, the charge will be 1.5%. In the case of equity mutual funds with the daily net assets of Rs 40,000 crore, SEBI said that total expense ratio will be a decline of 0.05% for every increase of Rs 5,000 crore of daily net assets. Rationalising the total expense ratio (TER), the fee that mutual funds collect from investors every year to manage their money, SEBI said the new fee structure would come into force from April 1, 2019.

Distributors earning over Rs.20 lakh a year can update their GST identification online on AMFI website. These distributors can avail of the benefits of input credit. GST norms mandate distributors earning over Rs.20 lakh a year to take GST registration. The limit is Rs.10 lakh for distributors from special states comprising Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand. Currently, the government has put distributors earning less than Rs.20 lakh a year and those who do not have GST registration from GST under reverse charge mechanism (RCM) until March 31, 2019. This means, such distributors will get gross commission.

AMFI has reintroduced online ARN renewal process for distributors. Earlier in October 2018, following the Supreme Court’s verdict on Aadhaar, AMFI had discontinued online registration and renewal of ARN for mutual fund distributors. However, the trade body has restarted online renewal process for distributors through Aadhaar. The process of ARN renewal is completely paperless and based on Aadhaar. Aadhaar is required to be linked with the mobile number to avail this online facility. In addition, the mark sheet of NISM Mutual Fund Distribution examination is no longer required to renew ARN. The renewal fees can be paid through net banking facility. Currently, distributors have to send their certificates to CAMS along with a DD of Rs.1,770 in favour of the Association of Mutual Funds in India as renewal fee. For new ARN and EUIN registration, distributors will have to go through physical process i.e. visit CAMS office with relevant documents such as PAN, Aadhaar, two passport size colour photos, DD of Rs.3540 in favour of Association of Mutual Funds in India, ARN registration form, KYD form and NISM pass certificate. They will have to undergo biometric for KYD.

SEBI will soon prescribe guidelines on pricing corporate bonds. All mutual funds will have to follow the valuation methodology. This will ensure uniformity in terms of valuation of corporate bonds across mutual funds. Moreover, SEBI would develop a supervisory and regulatory framework for pricing agencies, which would provide corporate bond pricing services related to mutual funds. Since debt securities are illiquid in nature and not traded like equities, mark-to-market valuation is challenging for fund houses since they have to quote NAV on a daily basis. Hence, most fund houses rely on rating agencies to derive NAV. Often rating agencies look at accrual to value debt securities. Credit rating agencies reflect the rating agencies’ opinion about the credit risk of debt securities based on historical data and some assumptions about the future, which tends to underplay the possibility of default. Following IL&FS default, SEBI wants to reduce risk in debt funds. One of the proposals being reportedly considered is allowing mark-to-market valuation of debt securities having maturities of less than 60 days. Furthermore, the pricing agencies may seek advice from mutual funds while evaluating the fair price of illiquid lower rated instruments. SEBI’s proposal to develop a framework for pricing agencies might help bring better transparency and uniformity in this segment and facilitate better risk management across the industry.

Sebi is planning to allow mutual funds to undertake 'side pocketing' of debt and money market instruments in case of a credit event while ensuring fair treatment to all unitholders. 'Side pocketing' is a mechanism to separate distressed, illiquid and hard-to-value assets from other more liquid assets in a portfolio. It prevents the distressed assets from damaging the returns generated from more liquid and better-performing assets. The proposal comes in the wake of the liquidity squeeze triggered by the Infrastructure Leasing & Financial Services (IL&FS) default. IL&FS and its subsidiaries have defaulted on several debt repayments recently due to liquidity crisis. Under the proposal, side pocketing may be permitted for debt instruments in mutual fund schemes based on credit events at issuer level. It may be optional for mutual funds to exercise such mechanism. Further, activation of side pocketing would be subject to trustee approval and there should be monitoring by trustees to ensure timely recovery of side pocketed assets as per the proposal. Also, there should be adequate disclosure to existing and prospective investors to enable informed decisions.

The long-awaited Self-Regulatory Organisation (SRO) for distributors is close to becoming a reality. SEBI has asked AMFI to start preparations for SRO. The SRO will assist SEBI and AMFI in regulating fund distributors and ensuring a cordial relationship with mutual fund houses. The SRO for mutual fund distributors will be responsible for micro-regulations of its members, spread awareness about mutual fund products among people, educate and train distributors and conduct screening test for them. The decision to set-up a SRO followed concerns about mutual fund distributors not being regulated and complaints against them for mis-selling products.

A recent CII and McKinsey report estimates that Indian mutual funds will grow at a CAGR of 18% to reach an AUM of Rs.50 lakh crore by 2023. The report said that the Indian market is on a strong growth trajectory. However, compared to other global markets, the Indian mutual fund industry is still at a nascent stage. The report predicts the key trends that will contribute to the growth of the Indian mutual fund industry. Mutual Funds are becoming a key investment vehicle as assets parked in cash and deposits are moving to investment products. Mutual funds as a share of bank deposits have grown from 12% to 20% in the last three years. Regulatory push (in terms of TER incentive) to spread mutual funds beyond top cities has led to B30 cities gaining prominence in the industry AUM mix. Retail investors are slowly increasing their allocation via the direct route. The effect is expected to be more pronounced with new-age online channels providing a low cost and easy investment option. Regulatory push for transparency and simplicity, organising financial inclusion programs country-wide, focus to reduce the cost of investment through rationalisation of TERs and change in the pay-out framework are some of the investor-centric measures initiated by the regulator and the industry.

Monday, December 24, 2018

December 2018

The asset base of the Indian mutual fund industry rose to a little over Rs 24 lakh crore in November 2018, an increase of 8% from a month ago led by strong inflows into liquid schemes. According to Association of Mutual Funds of India (AMFI) data, the asset under management (AUM) of the 42-player mutual fund industry jumped from Rs 22.23 lakh crore in October 2018, to Rs 24.03 lakh crore in November 2018. Amid intermittent bouts of volatility, Sensex and Nifty rose slightly over 4% in November 2018. The industry received Rs 7,985 crore through the SIP route in November 2018, a rise of 35.44% compared to the previous year. SIP flows continue to hold their position at Rs. 7,985 crore during November 2018, indicating resilience on part of retail investors to continue to invest in the India growth story. Though there was no increase in SIP flows when compared to the previous month, 3 lakh new SIP accounts were added during the month indicating that new investors are entering the SIP fold. The total number of SIP accounts stand at 2.52 crore at the end of November 2018.

Mutual fund inflows grew more than four times to touch Rs. 1.42 lakh crore compared to Rs. 35,529 crore during October 2018, shows AMFI data. A key contributor to this increase is the sharp rise in liquid fund flows which grew from Rs. 55,296 crore in October 2018 to Rs.1.36 lakh crore in November 2018. Liquid funds that witnessed significant redemption in the last two months due to liquidity crisis are back in action. The liquid or money-market category inflows rose for the second consecutive month to Rs 1.36 lakh crore, up by nearly two-and-half times. With the latest inflow, the total infusion in mutual fund schemes reached about Rs 2.23 crore in the first eight months (April-November) of the current fiscal, latest data with AMFI showed. The latest inflow has been mainly driven by contributions to liquid funds and equity-linked saving schemes. Liquid funds attracted Rs 1.36 lakh crore, while Rs 8,400 crore was invested in equity-linked saving schemes and Rs 215 crore in balanced funds. Interestingly, gold exchange-traded funds (ETFs) saw a net inflow of Rs 10 crore after witnessing pull-out in the past several months. In contrast, income funds saw a pull-out of Rs 6,518 crore. While AUM of the mutual fund industry and the total inflows went up, inflows in equity schemes, fell by nearly 33% compared to the previous month to Rs 8,414 crore in November 2018, according to data released by the Association of Mutual Funds in India. This is due to increased market volatility, global trade war tensions and uncertainty over the state elections.

The latest SEBI data on mutual fund industry folios shows that the industry added 7.05 lakh folios in November 2018. The number of folios added during the month was 4.32 lakh lower than what the industry added in October 2018. In line with the lower inflows in equity funds, the folio growth in the category dampened too. Compared to October 2018, which recorded healthy folio creation in equities to the tune of 10.6 lakh, the industry added 6.6 lakh new folios in November 2018. The lower growth numbers can be attributed to lump sum investors taking the wait and watch approach in the face of higher volatility. Mirroring previous month's trend, liquid funds recorded the highest growth in folios in percentage terms. Folios in liquid funds grew at a robust 3.4% during the month. However, owing to smaller base effect the actual increase in liquid folios is 49,631 folios. The growing interest in liquid funds can be attributed to investors leaning towards safety in the aftermath of the NBFC credit event. Moreover, advisors recommending staggered investments in equities through STP in liquid funds (instead of lump sum) may have also helped shore up their popularity. Gold ETF, which saw folio erosion to the tune of 2,628 folios in October 2018, added 6,009 folios during November 2018. Dhanteras, a festival when investors typically purchase gold, fell in November this year.  This may have led to the increased interest in gold ETFs.  Overall, all categories of funds reported a growth in their folios except income funds, which saw a decline in their folio count. 

Retail investors have been the key drivers of mutual fund industry in the last few years. Retail AUM grew at 31% on an annual basis since 2014, according to the latest CII and McKinsey report titled ‘India Asset Management: Coming of Age’. A major portion of the retail AUM growth (84%) came from inflows while the rest came from mark to market gains.  The trend reversed in the institutional segment. Here, only 37% of the growth came from inflows. The institutional AUM grew at 23% per annum during the period. Overall, the industry grew by 27% per annum to reach Rs. 21 lakh crore in March 2018. Over 65% of this growth was contributed by increased inflows while the balance 35% came from performance of the funds. Analysing the data further, the report found that 45% of the inflows came from equity funds. The impact was even more pronounced in retail segment where 65% of the retail flows were in equity funds. The AUM growth has been complemented by growth in profitability. The profit margins grew by 47% of in the last four years (covers around 80% of the industry AUM with 18 participants in annual McKinsey India asset management benchmarking). In absolute terms, there has been a massive growth in profit pools by around 3.5X compared to the FY 2014 levels according to the report. Around 80% of overall cost reduction was contributed by better efficiencies in middle back office sub function due to economies of scale.

Individual investments in mutual funds are expected to grow at 21.04% CAGR in the next five years to reach Rs. 30.34 lakh crore by FY 2022-23, according to the ninth edition of Karvy Wealth Report. Currently, individual investors have assets of close to Rs.10 lakh crore in mutual funds. Individual investors include HNIs and retail investors. Subsequently, mutual funds will occupy 5.86% wallet share of individual investors’ financial assets. Moreover, as of FY 17-18, 68% of individual wealth invested in mutual funds is in equities. This number is expected to increase in the coming years as more investors will look at mutual funds as one of the easiest ways to participate in the Indian equity markets. The report also mentions that with a sustained bull run expected in equity markets in the coming years, direct equities are likely to remain the favourite of investors. According to Karvy estimates, direct equities will reach Rs. 145.98 lakh crore by FY 22-23 growing at 24.41% CAGR. Direct equities include promoters’ shares as well. Following direct equities, fixed deposits and insurance will take the next two spots in terms of investor’s allocation to financial assets. The predominance of fixed deposits can be attributed to the fact that many Indians have entered the financial asset space for the first time by opening a bank account in the last few years. Moreover, the safety associated with fixed deposits makes it a safe option for senior citizens and low wage earners.

Piquant Parade

Pramerica Financial (Pramerica), a brand name used by Prudential Financial, Inc. of the United States, is set to acquire the entire 50% stake of DHFL in its joint venture subject to regulatory approval. With this, DHFL Pramerica Mutual Fund will now become Pramerica Mutual Fund. The transaction is subject to signing of definitive documentation, customary closing conditions, and regulatory and other approvals. Pramerica ranks among the top 10 largest investment managers in the world with more than $1 trillion in AUM. Pramerica and DHFL formed the joint venture in 2014 and expanded its business through the acquisition of Deutsche Mutual Fund. In another development, Baroda Mutual Fund is reportedly bringing in a new foreign partner. Last year, Bank of Baroda had purchased the 51% stake held by foreign partner Pioneer Investments in their joint venture asset management company.

To make a mark in the mutual fund ranking space, Samco Securities has introduced RankMF, a platform to help investors select a mutual fund scheme based on several data points. RankMF will not only rate and rank the scheme based on the past performance but also on a slew of other factors such as expense ratios, standard deviation, beta, market valuations, multiples, portfolio holdings and diversification/concentration of portfolio, the cash ratio, size of the fund, and the predicted yields. Mumbai-headquartered, Samco Securities is a fintech start-up in the discount broking industry with over 1 lakh customers. The website, will also analyse the quality of actual portfolio holdings since that is going to deliver real returns to investors and not historical returns which are used by other ranking platforms. Among the existing mutual fund ranking platforms are CRISIL, Value Research, and Morningstar. The difference in the performance of the mutual fund can be as high as 50% and therefore, the selection of a mutual fund scheme is critical. Rank MF will also give filters such as whether the time is right for investments or not and also on the strength of mutual fund schemes. The company has also introduced RankMF SmartSIP, which will generate a signal based on the margin of safety as to whether an investor should continue with the SIP in the same scheme or switch to another fund.

After the success of ‘Mutual Funds Sahi Hai’ campaign, AMFI is set to launch its new campaign reportedly called ‘FD Jaisa Lagta Hai’ (debt funds are like bank fixed deposits) that will promote the benefits of investing in debt funds. ‘Mutual Funds Sahi Hai’ debt campaign being an innovative campaign required a lot of time for ideation and conceptualisation. The first ‘Mutual Funds Sahi Hai’ campaign ran across different media channels such as TV, online platforms, print, radio, hoardings in multiple languages. They plan to adopt a similar route to spread awareness about debt. Will the debt campaign capture the imagination of investors (to increase retail participation in debt markets) as the first campaign did? Only time will tell.

to be continued…

Monday, December 17, 2018

December 2018

NFOs of various hues adorn the December 2018 NFONEST.

Motilal Oswal Liquid Fund

Opens: December 11, 2018
Closes: December 18, 2018
Motilal Oswal Liquid Fund is an open-ended liquid scheme launched by Mostilal Oswal Mutual Fund. The investment objective of the scheme is to generate optimal returns with high liquidity to the investors through a portfolio of money market securities. The fund is benchmarked against the CRISIL Liquid Fund Index. The fund is managed by Mr. Abhiroop Mukherjee.

Tata Nifty Exchange Traded Fund
Opens: December 17, 2018
Closes: December 19, 2018
Tata Mutual Fund has launched a new fund named Tata Nifty Exchange Traded Fund, an open ended exchange traded fund tracking Nifty 50 Index. The investment objective of the scheme is to provide returns that closely correspond to the total returns of the securities as represented by the Nifty 50 index, subject to tracking error. The scheme would invest 95% - 100% of assets in equity and equity related instruments covered by Nifty 50 index with high risk profile and up to 5% of asset in Money Market Instruments including CBLO or any other instrument as may be permitted by SEBI and units of liquid scheme of Tata Mutual Fund with low risk profile. Benchmark Index for the scheme is Nifty 50 (Total Return Index). The fund manager is Mr. Sailesh Jain.

SBI Debt Fund Series C 33
Opens: December 13, 2018
Closes: December 20, 2018
SBI Debt Fund Series C33 is a close-ended debt scheme launched by SBI Mutual Fund which matures 1216 days from the date of allotment. The scheme endeavours to provide regular income and capital growth with limited interest rate risk to the investors through investments in a portfolio comprising of debt instruments such as Government Securities, PSU and Corporate Bonds and Money Market Instruments maturing on or before the maturity of the scheme. The fund is benchmarked against CRISIL Medium Term Debt index. The fund Manager is Ms. Ranjana Gupta.

ICICI Prudential Capital Protection Oriented Fund XIV-B
Opens: December 17, 2018
Closes: December 31, 2018
ICICI Prudential Capital Protection Oriented Fund XIV-B is a close-ended capital protection oriented scheme launched by ICICI Prudential Mutual Fund which matures 1201 days from the date of allotment. The investment objective of the scheme is to seek 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 scheme. The fund is benchmarked against the Crisil Composite Bond Fund Index (85%) and Nifty 50 Index (15%). The fund managers are Mr. Rajat Chandak (Equity portion), Mr. Rahul Goswami and Ms. Chandni Gupta (Debt Portion) and Ms. Priyanka Khandelwal (ADR/GDR and other foreign securities).

Shriram Long-term Equity Fund
Opens: December 17, 2018
Closes: January 18, 2019
Shriram Long-term Equity Fund is an open ended equity linked savings scheme with a statutory lock in of 3 years and tax benefit. The primary investment objective of the scheme is to generate income and long-term capital appreciation from a diversified portfolio of predominantly equity and equity related securities and enable investors to avail the income tax rebate, as permitted from time to time. The fund is benchmarked against NIFTY 500. The fund is managed by Mr. Kartik Soral.

Canara Robeco Capital Protection Oriented Fund - Series 10, IDFC Overnight Fund, DSP Overnight Fund, Kotak Overnight Fund, ICICI Prudential Bharat Consumption Fund, ICICI Prudential Capital Protection Fund - Series XV, IDFC Floating Rate Fund, SBI Debt Fund Series C–35 to 40, ICICI Prudential MNC Fund, ICICI Prudential Commodities Fund, Sundaram Overnight Fund, Indiabulls Overnight Fund, Axis Overnight Fund, SBI US Equity Feeder Fund and ICICI Prudential Private Banks ETF are expected to be launched in the coming months.

Monday, December 10, 2018

December 2018

The consistent performance of all four funds in the December 2017 GEMGAZE is reflected in all the funds holding on to their esteemed position of GEM in the December 2018 GEMGAZE.

Birla Sun Life Banking and PSU Debt Fund (erstwhile Birla Sunlife Treasury Optimiser Fund) Gem
Birla Sun Life Banking and PSU Debt Fund was launched nearly a decade ago in April 2008. The current AUM of the fund is Rs. 4,685 crore. Its return in the past one year is 5.88%, almost on par with the category average of 5.72%. The number of holdings in the fund’s portfolio is 100 with an average yield to maturity at 8.36%. The expense ratio of the fund is fairly low at 0.64%. The fund is benchmarked against the CRISIL Short-term Bond Index. The fund is managed by Mr. Kaustubh Gupta since September 2009 and Manish Dangi since April 2017.

Birla Sunlife Dynamic Bond Fund Gem
Birla Sunlife Dynamic Bond Fund, launched in September 2004, which managed assets worth Rs. 11,837 crore the previous year, making it the largest fund in the income category, sports an AUM of Rs 5269 crore, nearly half its size now. The one-year return of the fund is 3.92% as against the category average of 4.03%. The expense ratio is 1.61%. The fund has 67 holdings with the yield to maturity of 9.52%. The fund is benchmarked against the CRISIL Short-term Bond Index. The fund managers are Maneesh Dangi since September 2007 and Pranay Sinha since April 2017.

SBI Magnum Gilt Fund - Long term Plan (erstwhile SBI Magnum Gilt Fund) Gem 
Launched in December 2000, the fund has an AUM of Rs 1,609 crore. The one-year return of the fund is 3.39% as against the category average of 4.03%. The fund has outperformed its benchmark over three- , five- and ten-year timeframes. It has delivered a compounded annual return of 8.15% over the last three years. The fund is benchmarked against the CRISIL Dynamic Gilt Index. The fund has 9 holdings with the yield to maturity of 7.11%. The expense ratio of the fund is 1.12%. Dinesh Ahuja has been the fund manager since January 2011.

Birla Sunlife Money Manager Fund (erstwhile Birla Sunlife Floating Rate Short term Fund) Gem
This relatively young fund, launched in October 2005, boasts of a massive AUM of Rs 6,088 crore.  In the past one year, this liquid fund has returned 7.76% as against the category average of 6.61%. The number of holdings in the fund’s portfolio is 46 with an average yield to maturity at 7.8%. The expense ratio is a mere 0.27%. The fund is benchmarked against the CRISIL Liquid Index. Kaustubh Gupta and Mohit Sharma are the fund managers since July 2011 and April 2017 respectively.

Monday, December 03, 2018

December 2018

The What, Why, Who and How of Debt Funds…


Debt Funds are those which allocate investors’ money in fixed-income earning instruments i.e. treasury bills, corporate bonds, government securities, commercial paper and other money market instruments. The main objective to invest in a debt fund is to accumulate wealth by means of interest income and steady appreciation of the fund value. The underlying securities generate interest at a fixed rate throughout the tenure for which you stay invested in the fund.  The fund manager of a debt fund invests in the underlying securities on the basis of their respective credit ratings. A higher credit rating indicates that a debt security has a higher chance of paying interest regularly along with repayment of the principal upon expiry of tenure. Apart from that, the fund manager aligns his investment strategy according to the overall interest rate movements.  

Some misconceptions regarding Debt Funds

·      Debt funds are very risky:
Just because debt funds under performed FDs when equity gave fantastic returns, does not mean that debt funds are as risky as equity. In a bad bear market, equity funds can fall 20% or more. Even in a bad year for bond market like 2017, debt funds were able to generate positive returns. Debt funds are much less risky than equity funds. Further, many debt fund managers employ a flexible investment strategy to safeguard investor interests in different debt market conditions.
·        Short term debt funds have no interest rate risk:
Any debt fund whose, maturity profile is more than a year, will be subject to interest rate risk. As such, even short term debt funds have interest rate sensitivity. However, the interest rate risk is limited compared to long term debt funds.
·        There is no risk in debt funds if RBI keeps rates unchanged:
Bond yields can change even if RBI keeps rates unchanged. Investors should understand that the Government is the biggest borrower. If the Government of India needs to borrow more to meet its different obligations towards the economy, then bond yields will go higher, bond prices will fall and consequently, debt funds will give lower returns. In an increasingly globalized economy, bond yields in India also depend on bond yields in developed markets like the US. If US bond yields are increasing, then foreign investors are likely to shift their investment from emerging markets to the US Treasury Bonds, which is a much safer asset for them. Similarly, if the dollar is strengthening versus emerging market currencies, foreign investors will divert their funds to the US. To attract foreign investments, Indian bond yields have to rise and this may hurt existing bond investors.
·         Long term debt funds need market timing:
It is true that, if you time your long term debt fund investments at the top of the interest rate cycle, you can get excellent returns. However, market timing is not a necessary condition to get good returns from long term debt funds. The yield curve is usually upward sloping, which means that long term bonds give higher yields than short term bonds. If you have a long investment horizon then, you can benefit from the higher yield over long investment tenure and also from the fact that, over a long investment tenure interest rate or yield cycles reverse, meaning that you will have periods of both rising rates and falling rates. So while rising rates will cause prices to depreciate, falling rates will cause prices to appreciate.
·      Long term debt funds will always outperform short term debt funds in the long term:
For some debt fund investors this may come as a surprise, but long term debt funds do not always outperform short term debt funds in the long term. The definition of long term can be quite subjective and vary from investor to investor. From a debt fund perspective, let us assume that, 3 to 5 years investment tenure is long term. In the last 3 years, short term debt funds gave 7.9% annualized returns while long term debt funds gave 7.4% annualized returns; in the last 5 years, short term debt funds gave 8.3% annualized returns while long term debt funds gave 8% annualized returns. Over both time-scales, short term debt funds outperformed long term debt funds by varying margins. Over very long term, the relative performances of short term and long term debt funds actually evens out, with no significant advantage to either category.


Debt funds are chosen by those who are looking for steady income with relatively lower risks, as it is comparatively less volatile than equities. In other words, debt funds are more preferred than equities because the risk is low. Debt funds are preferred by individuals who are not willing to invest in a highly volatile equity market. Debt mutual funds also help to provide tax efficient regular cash flows via systematic withdrawal plans or SWPs. Since these funds invest in fixed income securities, debt funds offer better safety on long term basis along with better returns. Debt funds are a vital component of a well-diversified portfolio as their returns are typically more stable (less volatile) than equity funds. Thus, diversifying nature of debt funds reduces the overall portfolio risk.


Debt funds are chosen by investors who are conservative and who do not wish to take exposure to the equity market. They want to grow their wealth but in a less volatile manner. Additionally, they would be concerned about regular income as well. Investors usually stay invested in debt funds for a short-term and medium-term horizon. You need to choose an appropriate debt fund according to your investment horizon. Liquid funds may be suitable for a short-term investor who usually keeps his surplus funds in a saving bank account. Liquid funds will provide higher returns in the range of 7%-9% in addition to the flexibility of withdrawals at any time just like a saving bank account. If you need to ride the interest rate volatility, then dynamic bond funds may be an ideal option. These funds are suitable for a medium-term investment horizon to earn higher returns as compared to 5-year bank FD.  


How to evaluate Debt Funds?

Fund Objectives
Debt Fund aims to earn optimal returns by maintaining a diversified portfolio of various types of securities. You can expect them to perform in a predictable manner. It is because of this reason, that debt funds are popular among conservative investors.
Fund Types
Debt funds are further divided into various categories like liquid funds, monthly income plans (MIPs), Fixed Maturity Plans(FMPs), dynamic bond funds, income funds, credit opportunities funds, GILT funds, short-term funds and ultra-short-term funds.
Debt funds are basically exposed to interest rate risk, credit risk, and liquidity risk. The fund value may fluctuate due to the overall interest rate movements. There is a risk of default in the payment of interest and principal by the issuer. Liquidity risk happens when the fund manager is unable to sell the underlying security due to lack of demand.
Debt funds charge an expense ratio to manage your money. Till now SEBI had mandated the upper limit of expense ratio to be 2.25%.
Investment Horizon
An investment of 3 months to 1 year would be ideal for liquid funds. If you have a longer horizon of say 2 to 3 years, you may go for short-term bond funds.
Financial Goals
Debt funds can be used to achieve a variety of goals like earning additional income or for the purpose of liquidity.
Fund returns
You need to look for consistent returns over long-term say 3, 5 and 10 years. Choose funds which have outperformed their benchmark and peer funds in a consistent manner across different time frames. However, remember to analyze the fund performance which matches your investment horizon to get relevant results.
Fund history
Choose fund houses which have a strong history of consistent performance in the investment domain. Ensure that they have the consistent track record for at least say 5 to 10 years.
Expense ratio
It shows how much of your invested amount is being used to manage expenses of the fund. A lower expense ratio means higher take-home returns. Choose a fund with a lower expense ratio which can give you superior performance.
Currently, the minimum tenure for long-term capital gains (LTCG) has been extended from one to three years. This means that investors will have to remain invested for at least three years in debt funds if they want the benefit of lower tax on long-term capital gains. If redeemed/used within three years or lesser i.e. short-term capital gains (STCG), the gains will be added to the person’s income and taxed as per the applicable income tax slab structure. However, if the investor can hold for more than three years i.e. LTCG, a debt fund will be taxed at 20% after indexation. Indexation (it allows you to inflate the purchase price using cost Inflation Index) takes into account inflation during the period that the investment is held by investor and accordingly adjusts the purchasing price which can lower the capital gains tax significantly. Another tax-friendly feature of debt funds is that there is no tax deduction at source (TDS) on the gains.
Financial ratios
You can use financial ratios like standard deviation, Sharpe ratio, alpha and beta to analyze a fund. A fund having, higher standard deviation, and beta are riskier than a fund with lower beta and standard deviation. Funds with a higher Sharpe ratio means it gives higher returns on every additional unit of risk taken.  
Modified Duration and VolatilityIn fixed income (debt) investing, primarily two types of investment strategies are deployed.Hold till Maturity
Duration Calls
This is also known as accrual strategy, by which the fund invests in certain types of fixed income securities (or bonds) and holds them till maturity of the bond, earning the interest offered by the bond over the maturity period.
Using this strategy the fund manager, takes a view on the trajectory of interest rates. Bond prices go up when interest rate falls and declines when interest rate goes up. Why? Suppose you bought a 20 year bond with a coupon (interest) of 9% at face value of Rs 100 a year back. If interest rate goes down by 1% during the year then bond yields will decline; in other words, new bond issuers will offer lower coupon (interest) rates. Since your 20 year bond will pay you higher interest rates than what current yields are, investors who wish to earn the higher interest rate, will be ready to pay more than Rs 100 for your 20 year 9% coupon bond. You can sell your bond which you bought at a face value of Rs 100 at a higher price and earn a profit, over and above the coupon payment you received in the last one year. Long term debt funds like Long Term Gilt Funds, Income Funds and Dynamic Bond Funds etc are examples of debt funds which take duration calls based on interest rate expectations.


Many income funds are showing double-digit annualised one-month returns as high as 57%. Indiabulls Income Fund has offered the highest annualised returns of 57%, followed by ICICI Prudential Income Fund (51.66%) and Reliance Income Fund (44%). The high returns are due to a sharp fall in the government securities’ yields in the last one month. Benchmark 10-year G-Sec yields have fallen because of the change in borrowing plan by the government and the RBI surprisingly cutting its inflation forecast. The central government has announced that it plans to complete around 47% of its borrowing in the first six months of the current financial year. The government generally completes around 60-62% of its targeted gross annual borrowing in first half of the year. The 10-year benchmark yield has fallen from 7.7%, in the beginning of March 2018 to 7.2% in beginning of April 2018, its lowest in four months. The inverse relationship between interest rates and bond prices is benefitting debt funds. Thus, debt schemes which were showing negative returns in January 2018 have turned green again. Income fund category is offering an average one-month annualised return of 22.48%.

Bond with the best

Debt mutual funds have products starting from Liquid funds with lesser than 91 days of maturity papers, to Long-term gilt funds with 8-10 years maturity. Choice of funds depends on your objective and the average maturity of papers. If you need money after 1 year then there is no point being into a long-term gilt fund with 8 years of average maturity, as this might make your portfolio more volatile. Similarly, if your horizon is 10 years or more, then being in short-term papers sometimes may not make sense. Selecting the category of debt mutual funds first becomes crucial. Investing aggressively at the longer end of the yield curve could prove imprudent. To put it simply, investing in long-term debt fund (holding longer maturity debt papers) can be perilous, since most of the rally has been already captured at the longer end of the yield curve. In fact, short-term maturity papers are turning attractive and fund houses are aligning their portfolio accordingly too. Ideally, you will be better-off if you deployed your hard-earned money to short-term debt funds. But ensure you are giving due importance to your investment time horizon, asset allocation, and diversification. Consider investing in short-term debt funds for an investment horizon of up to two years. If you have an investment horizon of 3 to 6 months, ultra-short term funds (also known as liquid plus funds) would be the most suitable. And if you have an extreme short-term time horizon (of less than 3 months), you would be better-off investing in liquid funds. Do not forget that investing in debt funds is not risk-free. Some other options to invest in debt instruments are tax-free bonds, especially, if you are in the highest tax-bracket. A few highly rated corporate deposits and bonds may also yield better returns than bank FDs. Ensure you study the company's financials before investing, as the risk of default cannot be ignored. This will buffer you from any financial shock. Sensible and astute investment strategy serves the path to wealth creation and it is always beneficial for your long-term financial well-being.