How to invest this 1 crore to get maximum trading margin from pledging?

General
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For my equity portfolio - Nifty 50 ETF is my foundation i.e max allocation, then Nifty Next 50 ETF and thereafter directly into stocks.
Debt funds of corporates are not my forte as the underlying is the same - if I can take the risk in giving company my money, I feel I should be a shareholder. I fully believe in Bank FD as this has nothing to do with equity and where returns are fixed and assured. My aim is that my daily bread should come from FD. This will ensure that I can hold on to equity and not panic if it goes south.

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23

Okay, here is the only thing you need to know:

All debt investments returns are fundamentally dependent on the interest rates. If you want to get an assured 6% return then buy the 40year government bond.

If you don’t mind your returns fluctuating with the interest rates, buy the bills (overnight, liquid, short term funds)

Every other debt fund (money market, corporate, long & gilts), you are pretty much better off buying the gov bonds.

I have 50% in liquid & overnight funds, 50% in gov bonds.

(I don’t bother with equity because my capital is what i use to generate returns by trading and i can’t afford it going all over the place)

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I already replied to you on traderji …

Also why do you keep mentioning the amount everywhere, it has no relevance and probably you should keep it private ? Anyway, good luck.

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Hello @neha1101

I hope you wouldn’t mind it. Since I have been doing a lot of searching regarding the various Debt Funds and their advantages, therefor this point keeps on coming up again and again that if the Debt Funds are chosen wisely, then they could give much better returns then the Bank Fixed Deposits. Since you mentioned your preference for the FD’s, therefor I thought I should share this information with you, so that you can make better financial decisions in the future.

Contrary to the popular opinion, Bank FD’s are guaranteed to the maximum amount of Rs 5 lac only by the RBI, even if you have the FD of Rs 5 crore in that bank.

Bank FD returns are charged according to your income tax slab, so for the higher tax brackets, their returns gets depleted.

Debt funds offer the Indexation Benefits, if they are held for more then 3 years duration, this benefit is not available for the Bank FD’s.

You may check more details from the following links -

Taxability

Debt investing is tax-efficient and attracts less tax than other investment instruments. Here are the tax aspects to be aware of:

With the best debt funds, you are liable to pay short-term capital gains if your investment period is less than 3 years. These are to be paid at your income slab rate.

If the investment period is more than 3 years, you will need to pay long-term capital gains tax. LTCGs are taxed at 20% with indexation benefits. However, the tax needs to be paid only at the time of redemption.

There is a tax advantage with debt investing. Let’s understand this with the help of an example – Assume that you are debt investing and the fund gave you an 8% return, and the inflation rate is 5% during that period. You will only need to pay tax on the 3% of the debt mutual fund returns. There is no such provision in the case of fixed deposits.

How capital gains are taxed depends on the length of time for which an investor holds the units of a mutual fund. If an investor stays invested in a debt fund for a period up to 3 years, capital gains on redemption/sale are considered as short-term capital gains and taxed at the income tax slab rate applicable to the investor.

However, if the debt fund is redeemed/sold after being held for more than 3 years, it is considered as long-term capital gain and the investor gets the benefit of “indexation”. This means that the purchase price is increased to adjust for inflation (using an index provided by the Government) before calculating the capital gain. Long-term capital gains are currently taxed at a rate of 20%.

Here is a simple example to explain this concept. Suppose Amit invested Rs100 in a debt fund in FY 2014-15 and sold it for Rs160 in FY 2018-19. Since Amit was invested in the fund for more than 3 years, he has earned long-term capital gains on the sale of his units. The Cost Inflation Index (CII) in FY15 and FY19 were 240 and 280 respectively. For tax purposes, Amit’s purchase price will be increased to (280/240) x 100, or Rs117, and taxable long-term capital gain will be 160 - 117 = Rs43. The tax payable is 20% of Rs43, or Rs8.60.

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I am summarizing the process here, if someone else is trying to do the similar analysis for pledging their investments of Debt Funds.

First you will have to decide which particular broker you want to use for this work.

Then go through the list of the accepted collateral which will qualify as the Cash Equivalents from that broker.

Then within that shortlisted list of Funds, you need to decide what is your time horizon for this investment. Ideally it should be more then 3 years, so that you can get the Indexation and the Tax Benefit, just as I have explained in my post given above.

Once these basic steps are done, then you will need to do this research to zoom in and finalize the exact names of the Debt Funds, which are worthy of your investment -

[QUOTE]https://www.indmoney.com/mutual-funds/debt-funds

How to evaluate debt funds?

Track record: If the fund has consistently outperformed its peers and the benchmark over a 3 year and 5-year horizon, it is an indication that the fund is well-managed. While past performance is no guarantee of the future returns, it is an important indicator about the track record of the fund, and helps in evaluation with respect to its peers.

Management: Management of the equity funds plays an important role in its performance. Hence, if you have confidence in the asset management company and they are doing an ideal job in necessitating growth, you can bank on this fund. Also, the reputation of the fund manager is an important factor to check.

Expense ratio attached to the funds: This is usually seen as a parameter against all kinds of funds. It is defined as the money undertaken by fund managers for maintenance, marketing, distribution and selling expenses, etc. The right fund will have a desirable expense ratio within the range of 0.5 to 2.5%, which is an ideal industry benchmark.

Asset allocation: One of the key things to look at is how diversified is your fund’s portfolio and where have they majorly invested in. Some funds may invest in more risky debt instruments to generate higher returns while others may invest in safer secturties like Government Bonds. Your risk and returns potential depends on the type of asset allocation you prefer.

Asset Under Management: Higher fund size is complicated to manage, and a smaller fund size lacks flexibility. The Asset under management should not be very high or very low. This allows the funds’ manager to liquidate investment and navigate swiftly during turbulent times easily.

[/QUOTE]

How to choose the best debt funds to invest?

  1. Returns- Funds should give consistent returns. Investors should look for the past 1 year, 2 year and 3 year returns.

  2. Risk- Investors should look for the holdings of the fund and they should be highly rated.

  3. Expense Ratios- Investors should look for funds with lower expense ratio.

Please feel free to ask anything else in this regards to finalize a few good Debt Funds which will give 6% plus returns over the next 3 years. This will be extra benefit for us.

Thanks to all the friends who have helped.

Best Regards

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Fully agree with what you have written. However, few things which are personal to me are

  1. When I do Asset Allocation, the underlying should be totally diversified.
  2. Taxation is not an issue, as I can park my money upto the max level among family members and by signing 15G form wherein TDS is not deducted.
  3. Ferooze Aziz of Anand Rathi had mentioned that the only way to get diversification is to invest in more than one debt fund wherein there is no overlap in the underlying.
  4. I need to pay commission on a yearly basis for a debt fund, this is not the case with FD. A small blessing in disguise.
  5. It is just not fair to compare a Corporate with that of a Bank and say an amount of only 5 lack is insured. Going by the same standard, Corporates offer NIL insurance and we pay commission. If we become so picky on banks on our risk parameters, then Corporate do not even stand a chance.
  6. We all know what happened to FT.

Again, each strategy is based on each individuals risk taking ability.

I conclude by saying, I am ok with Gilts or Government Bond but not ok with Corporate Bonds. This is my personal choice.

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Yes neha, all your points makes sense.

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Quote
The Nippon India mutual fund was the biggest holder of additional tier-1 bonds issued by Yes Bank between 2016 and 2019 and held Rs 25,000 crore out of Rs 84,100 crore of such securities issued by Yes Bank, according to report citing court documents.

These bonds were cancelled in 2020 by Yes Bank as part of its restructuring, which has been challenged in court by bondholders.
Unquote

I believe it is Nippon India Strategic Debt Fund. They had two segregated portfolio, one for vodophone which they recovered and second was Yes Bank.

What is even more mind boggling is when I searched for Nippon ETF on NSE website, the fund name is shown as

Reliance Nippon Life Asset Management Limited and many others.

The name changed but NSE website still continues to show the name of Reliance.

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