Debt mutual fund, by definition are designed to provide income generation in a relatively more stable manner as compared to equity oriented funds, with the underlying instruments being fixed income and money market securities. With respect to debt mutual funds, we have seen the portfolio YTMs (Yield to Maturity) fall as a result of falling interest rates and host of credit events impacting the Credit Risk Fund category over the last 18 months.
The lower returns from debt funds is not at all a bad news as the inflation has been sustaining lower levels as compared to the country’s long term averages. What matters to an investor is the real returns, i.e., the returns over and above the inflation levels, which has not reduced over a period of time. For instance, a 6% return with a 3% inflation (real returns of 3%) would be better than an 8% return with a 6.5% inflation (real returns of 1.5%). One must also remember the returns from traditional investment avenues like FDs have also fallen in tandem.
As far as the credit events are concerned, the last 18 months have a great opportunity for learning for the industry, the distributor and the investor communities. The recent credit events seen in the industry brought out the potential risks in Credit Risk Funds and taught us the importance of checking client suitability before investing in the category. As a fallout of these events, the credit spreads have widened, resulting in Credit Risk Funds offering higher YTMs, which may be attractive for investors who are willing to digest the inherent risks.
To put it in a nutshell, debt funds offer a well-diversified portfolio as compared to traditional debt instruments with absolute transparency in terms of portfolio disclosure. There are various categories of debt funds to choose from, that offer different average maturities of the underlying instruments with varying degrees of credit risks. From a post-tax return on investment perspective, investing in a debt fund is advantageous with a holding period of over 3 years being eligible for getting taxed as Long Term Capital Gains, thereby offering indexation benefit. One needs to spend time with the investment advisor to understand the risks involved and taxation details in a debt mutual fund.
HDFC Mutual Fund offers schemes in all major debt fund categories. The key funds from an individual investor’s perspective are detailed below:
HDFC Ultra Short Term Fund
Focuses on investing in debt securities and money market instruments such that the Macaulay Duration of the portfolio is between 3 and 6 months.
HDFC Low Duration Fund
Focuses on investing in debt securities and money market instruments such that the Macaulay Duration of the portfolio is between 6 and 12 months.
HDFC Short Term Debt Fund
Focuses on generating regular income by investing in debt & money market instruments while maintaining a Macaulay Duration 1 to 3 years.
HDFC Banking and PSU Debt Fund
Focuses on generating regular income by investing predominantly (a minimum of 80%) in debt securities issued by Scheduled Commercial Banks, Public Sector Undertakings (PSUs), Public Financial Institutions (PFIs), Municipal Corporations
HDFC Corporate Bond Fund
Focuses on generating generate income by investing predominantly (minimum 80%) in corporate bonds rated AA+ and above and
HDFC Credit Risk Debt Fund
Invests a minimum of 65% into a diversified portfolio of debt securities, with as rating of AA and below ( excluding AA+ rated bonds)
For complete portfolio details, refer www.hdfcfund.com. The information given is for general purposes only. Past performance may or may not be sustained in future. The current investment strategies are subject to change depending on market conditions. The statements are given in summary form and do not purport to be complete. The views / information provided do not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this information. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. Please seek professional advice before taking any investment decisions.
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