The Debt Fund Investment Thread

[Vyom]

So I have been an investor in Mutual Funds since a few years now. 70% of my investment portfolio is invested in Equity. While rest are PPFs and some gold.
I wanted to park some money for emergency and also some in debt instruments, for diversification. But as it turns out debt funds are more confusing than equity.

There are a lot of types of funds in equity depending on the risk and target investment horizon. So I am making this thread to share our knowledge towards debt funds for anyone who is interested enough to invest in them.

Disclaimer though: I am not a SEBI registered advisor and anything we discuss in this thread should not be considered an investment advice.

So below are some of my learning (or notes) from few videos (which I will link below).

A bond = Loan by company from us (investors)
Debt Mutual Funds = portfolio of different bonds

There are certain risks in debt funds:

• Credit Risk: It can be checked from ratings given by Crisil.
• Liquidity Risk: When the amount can't be redeemed due to liquidity issues
• Interest Rate risk: It's mostly in Guilt funds, most volatile

These are major types of debt funds based on duration:

• Liquid Funds: Lowest risk, replacement of bank, for slightly more returns than savings rate (to invest for upto 1 year)
• Ultra short term (For 3-6 months)
• Short term (For 6-12 months)
• Medium term (For 3-5 years)
• Long term (For 5+ years)

Now types of funds:

• Gilt Funds: Negligible credit risk (since invest in govnment security), so can invest for longer duration
• Credit Risk funds: Bit riskly, since invest in few low credit rating funds
• Banking & PSU funds: Credit security is good. One can invest for 1-3 year
• Dynamic Bond funds: Alternate b/w short and long term fund, so good fund
• Equity Market, Banking & PSU Fund, Gilt funds (is good for 3+ years)

To find best funds:

1. Check Fun Ratings: Check from 3 portals: Crisil, Value research, Morningstar
2. AUM: In equity, High AUM generaly means Low Returns, while in Debt funds, High AUM means it can give High Returns.
3. Past Performance
4. Risk Matrix
5. Modified Duration (should be low)
6. Fund Manager (shouldn't change. If fund manager changed, then it's as good as new fund)

These notes are from below 3 videos:
1. *www.youtube.com/watch?v=LyePk679Crw
2. *www.youtube.com/watch?v=TDU8lve33KI
3. *www.youtube.com/watch?v=QzBcS_56V_w

 

[Vyom]

~ Reserved for use. ~

 

[Vyom]

Keeping in mind the above I am now trying to find 2 best debt funds for below funds:

1. To park money for short term, so a liquid fund
2. A fund to park additional money that I don't want to expose to equity market risk, and for longer duration.

I have been able to find the below good gilt funds for second point, but still trying to figure out best liquid fund.

• ICICI Prudential Gilt Fund - Direct Plan
• SBI Magnum Gilt Fund - Direct Plan

Thoughts welcome.

 

[Nerevarine]

AFAIK, If you put money in debt fund for 3+ years, it attracts a lower income tax, but not 100% sure.

 

[khalil1210]

There are recent changes in debt funds You can go through this thread once. Tax benefits which used to be there on Debt funds is removed. You will have to pay taxes based on your income percentage.

*www.reddit.com/r/IndiaInvestments/comments/120dm2s/need_clarity_debt_funds_ltcg_benefits_may_be/

In a major setback for Mutual Fund (MF) investors, the government may do away with the long term capital gain (LTCG) tax benefit benefits that a debt fund mutual investors enjoy. According to the proposed amendments, in the Finance Bill 2023, investment in mutual fund where not more than 35 percent is invested in equity shares of Indian company will now be deemed to be short-term capital gains. This will apply to investments made on or after 1 April 2023. Currently, investors in debt funds pay income tax on capital gains according to the income tax slab for a holding period of three years. After three years these funds pay either 20% with indexation benefits or 10% without indexation.

---

Its pointless investing in debt funds now. With FD now you get fixed rate, 5 L insurance and same taxation as debt funds.

The debt fund market is as good as dead.

They want people to move money from debt funds to banks so that big loans can be given out to cronies by these banks without any due diligence at much favorable rates, while raising funds from debt market requires far more due diligence that's carried out by investment banks


All of this being proposed overnight, and passed by 1 PM the next day

Shameless governance

Just hope this doesnt cause any run on debt funds leading to another frankin templeton kinda situation. Total clowns running the show

*www.livemint.com/news/india/from-t...anges-in-the-finance-bill-11679648639211.html

1) Debt mutual funds: The government will tax investments in debt mutual funds as short-term capital gains, according to amendments to the finance bill passed in parliament today. This could strip investors of the long-term tax benefits that made such investments popular.


Mutual funds with less than 35% invested in domestic equities are proposed to be treated as short-term and the indexation benefits that help significantly reduce tax liability available to such funds may be removed prospectively, the amendments say.

As such, the tax rate applicable would be based on the income tax slab in which the investor falls.

Currently, investors in debt funds pay income tax on capital gains according to the income tax slab for a holding period of three years. After three years these funds pay either 20% with indexation benefits or 10% without indexation.

The new tax rules would apply to investments made on or after April 1, 2023, impacting new inflows into these funds.

 

[Nerevarine]

All of this being proposed overnight, and passed by 1 PM the next day

wtf ? I think apart from our usual risk calculation, we also need to account for govt retardiation risk. Imagine, building a portfolio for months and then its demolished by 1PM the next day.

 

[Vyom]

Yes, I did consider the fact that post new tax changes, there is little difference between FD and Debt funds now. From the source of this video: *www.youtube.com/watch?v=DNLHs5fEckU

Check this out:

The video concluded that yes in short term people will prefer FDs but in long term debt funds specially corporate bonds may give more interest just to lure investors back.

Also what this video didn't talk about is the flexibility of Debt funds over FDs. We can invest a particular amount on monthly basis in debt fund and also withdraw as per our needs, rather than to fix a lumpsum in FDs and then breaking them as a whole when there is a requirement to withdraw. Therefore the taxation would also be applicable for the amount which we withdrew and not the whole maturity amount.

I wanted to get a view on this.