Debt funds for a newbie

Hi, I am planning to allocate some amount of monthly investments in debt funds. I have good experience in equity funds but new to debt funds. Could some one help me for these queries

I am adding debt funds with expectation of 6-8% (better than FD’s). Another reason for adding debt funds is to make my portfolio to look green even when equity portion goes down. My tenure is 3+ years.

  • Do monthly SIP in debt funds meaningful?
  • Are debt funds better than arbitrage funds?
  • Is FD better than debt funds considering interest rate hikes?
  • Are gilt funds safer than corporate bond funds?
  • Which debt fund category is safest?
  • Which debt fund category yields high returns among debt category?
  • Considering rate hikes in near term future, is it worth investing in debt funds now?
  • Should we analyze the holdings of debt funds (AA, AAA+…) for selecting a debt funds?

Also, if you share me the debt funds in your portfolio, it will be useful for me to analyze more

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I am not an expert but my two bits are

You should hold on to your investment in debt fund for sometime as rate hikes are going to happen. There is a monetary policy this month end and one in December. If I were you, I would park my money in SB account and wait for some time and check how much more rate increase might happen. Thereafter decide on debt fund

Disc: I am always biased towards FD. So please take the above with a kilo of salt.

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@KANAGU explaining all the nitty gritty of debt fund on this forum would be slightly difficult.
Varsity has some good training material on debt fund. You can give it a try

This should answer lot of your questions. After that if you still have questions, you can raise it here.

I mainly hold 4 types of debt funds

  1. Constant maturity gilt fund - for my long term goal (15+ years). I do SIP in this
  2. Banking and PSU debt fund - 5+ year goal.
  3. Target maturity debt funds (mainly bharat bond and various SDL bonds) - This I treat as my FD investment. money which is needed after fixed terms
  4. Liquid fund - spare / emergency money

Hope this helps

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Thank you for sharing your debt portfolio @Akash_Shah

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Gone are those 8% days.

Then look further than ultra short term funds or money market funds.

As this is debt, if you have money, you can invest at once, of course after choosing an appropriate fund.

By better you mean better returns, know how arbitrage works, there have to be arbitrage opportunities for the funds to get returns.

Depends. It depends on your tax slab, way of withdrawal, need etc.

Gilts are very volatile, not recommended.

Overnight, so obviously the returns are always the lowest.

I think credit risk funds, but as the name is self explanatory, there is a chance of capital loss too.

As you want to invest for more than 3 years, the hikes and cuts have no significant impact, so invest as per your need and plan.

You can if you want to, you can check every month.

Debt funds although are straight and simple, and are stable compared to equity. They do come with credit risk, and interest rate risks. A credit downgrade makes a bond less valued when it changes hands, when it trades, and a default obviously means capital loss, unless and until the defaulter pays back. Interest rate hike or cut effects all bond funds, but the lesser the maturity of the bond, the lesser will be the impact, hence it is suggested to go with UST or MM funds even for a few years of investment. There is one other possible risk, happened in the past, redemption risk, so to speak, when for any reason investors want to redeem, just like panic selling in equity markets, there could be a withdrawal limit, even temporary halt for redemption, as the bonds have to be sold and cash is generated.

All reputed fund houses more or loss invests in the same kind of bonds, from the same companies too to some extent, so go with reputed fund houses, ones which you are comfortable with, check the AUM, check the number of bonds too, check their ratings, and take a decision.

But remember, there is a chance of loss that could come from any bond, to mitigate this, you can to constantly check the ratings of each bond in the PF, and if a bond is downgraded, check its weight in the PF, know about the issuer, and decide if you want to stay or exit if you expect a further downgrade or a default.

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Thanks @GB26 for the detailed explanation

@KANAGU

Typo, I meant look no further than UST and MM funds :man_facepalming:

Even for 3 years, you can invest in UST and MM funds. When you go beyond them, bonds’ duration may increase to years, which then will have interest rate impact.

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Sure… I am planning to invest only in liquid, UST and MM funds. Thanks

MM and UST can be considered for long term, liquid for short term, so choose liquid if it suits your needs, because after a year, if liquid fund may give only 4.5%, then you may think that you should have chosen other categories.

So risk and return wise, Overnight < Liquid < MM < UST.

Also invest with 2 or even 3 fund houses from the same category, if the amount is big, to be on the safe side, it may help.

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Debt funds are terrible from risk to reward perspective. In equity you take significant risk but you get rewarded it’s not same in debt funds. Inflation is lot high. I don’t even believe FD’s and liquid funds even beat inflation, entire consumer price index is fudged up and calculated without accounting to energy prices(petrol & gas I mean). Essentially there is a bigger chance it’s negative Interest rate.

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  1. AUM : Bigger the AUM the better debt fund works.
    2.Diversify across mutiple funds houses and multiple type of scheme
  2. Growth fund is better than any other type.
  3. Need to follow interest rate cycle.When interest rate rising can invest in short term funds ,corporate floater,psu/banking.When interst rates are peaked or down cycle than invest in Gilt, medium term ,long term funds.
  4. Returns are cyclical and depends upon interest rate and credit risk so past Returns are not guaranteed future returns.
  5. Investor should look at holdings of each fund at highlevel and modified duration and return to gauge the returns ,investment durations.
  6. If you systematically follow than you can earn 1-4% more returns than FD wrt to returns +taxes in long term .
  7. Debt funds are not advisable for small capital(< 20 lakhs)as volatility is not worth the returns .FDs or fixed bonds are better.
  8. Debt mutual funds are the best of you want margin for trading/investing(via futures)
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Debt is a different asset class, it is not supposed to beat inflation like equity. Debt is safeguarding a created corpus. Debt is a source of permanent cash flow.

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If it doesn’t beat inflation then that’s no asset by definition. Nobody accepts negative Interest rate. Imagine you saved 10 lakhs for 3 years to find out you get 8 lakhs in hand due to inflation. Inflation eats way more when amount is lot.

I would solidly agree on this. But I don’t believe this is for salary class at all, when you are employed having cash at hand why anyone would like negative Interest rate , they would rather spend it today. The proper way think it would work is take those monthly interest payments from bonds and reinvest 50% of them in index like SIP. Best is to opt for IDCW for those debt funds reinvest those on index .

@KANAGU already has Equity Portfolio, they want to diversify probably. They are not just investing in debt. Just like in All weather investing smallcase, it has liquid, gold, junior and nifty bees. Wanting stable return.

What’s the definition of an asset ?

I am saying this purely from risk to reward perspective. To diversify equity gold is used.

An asset is something that puts money in your pocket. Meaning appreciate with time , returns should be higher than inflation. Entire goal of investing is to protect us from inflation and get a better return. A lot of FD madness, debt fund , bonds all of which is considered stable safe investments came from gold standard era i.e Bretton woods which people are still carrying around.

An asset has characteristics, governed by certain rules, not necessarily should beat inflation.

Equity is volatile, many ups and down, so one cannot depend on this for cash flows. So the idea is that invest in equity, both capital and time, create a necessary corpus, and move a major portion of it, if not all, to debt, and enjoy life. Debt does not beat inflation, but it is the way to go, when you have corpus.

A young person has all the time in the world, so he can afford to invest in equity and wait for it to become profitable, not an old person, because he does not have a lot of time. Psychologically too, the roller coaster ride of equity is stressful.

Creating corpus is one thing and protecting is another, for creating equity, for protecting debt, and the inflationary calculations are embedded in the creating the corpus.

Lastly, this is personal finance, each one’s financial, professional, psychological, and social situation is different, so one can choose what works for him. To each his own.

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Can you tell me what is the CAGR of gold in the last 10 years ?
Much lower than debt I guess. I have not even calculated but I know how it has behaved in the last few years. That doesn’t mean it won’t outperform. It may. Or it may not.

Absolutely wrong. As asset is one which has the capacity to generate cash flows in future. I do not know of any definition which speaks about inflation. I do not know which commerce college you went to. Or did you?
According to your definition is cash an asset? You have anyways ruled out FD instruments and debt instruments as part of assets.
What about a motor car ? Furniture?
The original post is about which debt instrument is good and am scared you are helping him in any way.
All that you talk about in every post is inflation and central banks printing money. Arey. Chill man. That’s how it works.
Now for the person asking this question wants to make sure his capital is safe. So he is asking about debt instrument.
According to your definition please tell me what beats inflation ?? Equity ?? And if he wants funds for some emergency use?
Only other option he has is to withdraw all his money from bank account and keep in cash. Saying this because you feel saving bank also doesn’t beat inflation and hence it can’t be an asset. So he should keep it in cash? Every asset class has its own use. Not everything is about inflation.
For to understand better he has two options.
First one is to keep hard cash.
Second is to keep it in debt funds.
He has already decided to go for debt funds.

No.

And after typing all this I see somebody has already replied. Never mind.

Read the lines properly, he is looking something that would work when equity is down. Gold works during bad times 2008 crisis, great recession , corona

I am a simple man :stuck_out_tongue:. If FD’s and debt funds are great then why are majority still working. Even I dreamt too I will go to US & canada make 1 cr for 2 to 3 years and come back live on interest rates :rofl::rofl:. If your assets are great gives solid return and you have worked 10+ years then why are you working in first place :rofl:.
People who do just FD are usually dependedent on someone.

Now I have said this purely from investment- risk to reward perspective. I have no idea why you are bringing things like emergency fund nd buying small stuff like furniture , car and bike. I myself told in other post it’s doable with FD for emergency fund & for buying items nd all but don’t see FD as investment.

These notion of not working after X amount or ‘financial freedom’ , investment is equity is best , if you have invested X amount instead of buying the companies product.then you would have X crores., FD is worst ,debt is worst …blah blah …I see these on kind of shortsightedness , and FOMO ideas which are neighter bookish nor pragmatic.Just vague ideas.

If anything above is true then money lying in debt assets wont be 》》》 so much greater than equity and Adani’S/Ambani’s or any one HNI would have quit working or retired.Even Rakesh Jhunjhunwala/Warren buffet worked/working till there last breath.