Tag - Mutual Funds

January 2013

Understand the Risks in Debt Mutual Funds

risks in debt mutual funds, credit risk, interest rate risk, reinvestment risk, yield curve, YTM, yield to maturity

.

Debt funds carry indexation benefits and hence are more tax efficient than FD’s. Many financial planners recommend debt funds as a replacement for FD’s. However the debt funds do carry certain risks.

And it makes sense to be aware of those risks.

Investments in debt funds are subject to various risks like credit risk, interest rate risks, liquidity risks, market risks, reinvestment risks etc. Let us look at what these risks mean and how understanding these risks can make you a better investor.

1. Credit Risk : This refers to the risk that the issuer of a fixed income security may default (which means that, he will be unable to make timely principal and interest rate payments on the security)

2. Interest rate risks : This risk results from the change in demand and supply of money and other macroeconomic factors and creates price changes in the value of debt instruments. Hence, the NAV of the scheme may change due to the fluctuations. Prices of long term securities generally fluctuate more in response to interest rate changes than do short term securities. Thus, this risk may expose the schemes to capital erosion.

3. Liquidity Risk : This refers to the ease with which the security can be sold at or near to it’s valuation yield-to-maturity (YTM).

4. Market Risk : Market perception of interest rate sensitivity, general market liquidity, credit worthiness etc. may cause price volatility and hence lead to capital erosion.

5. Reinvestment Risk : This risk refers to the interest rate levels at which cash flows are received for the securities in the scheme is reinvested. The risk is that the rate at which the interim cash flows can be reinvested may be lower that that originally assumed.

So, how do fund managers try to mitigate these risk factors :

a. Interest rate risk : By keeping the maturities of the schemes in line with interest rate expectations. (Note the key here is expectations, so if the expectations go wrong, the strategy can mis fire).

b. Credit Risk or Default Risk : By investing in high investment grade fixed income securities rated by SEBI registered credit rating agencies. Eg: investing in AA/A rated securities carry a higher credit risk compared to AAA rated securities. Note, historically, though , the default rates for investment grade securities (BBB & above) has been less.

c. Reinvestment Risk : This is limited to the extent of coupons received on the debt instruments, which will typically be a very small portion of the portfolio

d. Market risks : The schemes may take positions in interest rate derivatives to hedge this risk.

Understand the risks, become aware and deal with these risks to make informed decisions towards building wealth.

You can read more about debt mutual funds here.

Top Debt Mutual Funds Performance as of Dec 2012

 Debt Mutual Funds Performance, Balanced Funds, Ultra Short Term, Monthly Income Plans, FMP's, Indexation , Tax Benefits

Here is the Top Balanced & Debt Mutual Fund Performers as of Dec 2012 

Balanced Fund
Scheme Inception Date Return 1 yr % Return 3 yr %
HDFC Children’s Gift Fund ~ Inv Plan Feb 09 2001 17.1 15.79
HDFC Balanced Aug 10 2000 16.83 13.44
ICICI Pru Balanced Oct 07 1999 21.8 12.16
Income Medium Term
Scheme Inception Date Return 1 yr % Return 3 yr %
SBI Dynamic Bond Jan 13 2004 11.99 9.51
Escorts Income May 22 1998 12.16 9.09
Birla Sun Life Medium Term Mar 25 2009 11.1 8.64
Monthly Income Plans
Scheme Inception Date Return 1 yr % Return 3 yr %
Canara Robeco MIP Apr 01 2001 11.54 8.44
SBI Magnum MIP Floater Nov 30 2005 10.66 8.19
Reliance MIP Dec 29 2003 15.52 8.09
Debt Floating Rate
Scheme Inception Date Return 6 mths % Return 1 yr %
FT India Life Stage FOF 50s + Floating Rate Jul 02 2004 6.39 11.14
HDFC Floating Rate Income LT Jan 08 2003 5.33 10.88
L&T Floating Rate Oct 27 2010 5.58 10.67
Debt Ultra Short Term
Scheme Inception Date Return 6 mths % Return 1 yr %
Birla Sun Life ST Opportunities Jun 27 2008 5.77 11.13
HDFC Floating Rate Income LT Jan 08 2003 5.33 10.88
Escorts Short Term Debt Dec 28 2005 5.66 10.73
Debt Income  Short Term
Scheme Inception Date Return 6 mths % Return 1 yr %
UTI Income Short Term Income Builder Jun 24 2003 5.45 10.55
SBI Short term Debt Jul 27 2007 5.52 10.52
IDFC SSI Short Term – Plan D Sep 02 2005 5.34 10.42
Debt Liquid Money Markets
Scheme Inception Date Return 1 mths % Return 3 months %
Escorts Liquid Sep 29 2005 0.81 2.46
Tata Liquidity Management Mar 01 2006 0.71 2.35
Principal Retail Money Manager Dec 27 2007 0.73 2.23

Many investors are ignorant of the advantages of investing debt funds investment avenue as an asset class. They prefer to keep funds in FD’s and other traditional debt instruments like PPF/KVP’s/NSC/Post Office etc ~ primarily due to lack of knowledge. You can know more about this debt funds here.

 

Top Equity Mutual Fund Performance based on 3 years returns

Equity Mutual Funds Performance, ELSS, Large Cap, Mid Cap, Small Cap, Index Mutual Funds, Best Mutual Funds

Here are the Top Mutual Fund Performers based on 3 years returns in the Equity Segment. The Equity asset class has outperformed every other class in the year 2012.

                                             Equity Large Cap

Scheme Inception Date Return 1 yr % Return 3 yr %
ICICI Pru Focused Equity Retail May 07 2008 22.08 11.73
Franklin India Bluechip Nov 30 1993 19.25 9.45
BNP Paribas Equity Sep 03 2004 24.04 9.16

Equity Multi Cap

Scheme Inception Date Return 1 yr % Return 3 yr %
ING Dividend Yield Oct 06 2005 18.09 11.71
BNP Paribas Dividend Yield Aug 30 2005 24.32 11.55
L&T India Special Situation Apr 26 2006 28.87 10.62

Equity Large & Mid Cap

Scheme Inception Date Return 1 yr % Return 3 yr %
Quantum Long term Equity Feb 25 2006 23.69 11.78
UTI Opportunities Jul 20 2005 23.2 11.78
Canara Robeco Equity Diversified Sep 12 2003 24.7 11.51

Equity Mid & Small Cap

Scheme Inception Date Return 1 yr % Return 3 yr %
SBI Magnum Emerging Businesses Sep 17 2004 38.68 24.6
Reliance Equity Opportunities Mar 07 2005 34.07 17.32
Canara Robeco Equity Opportunities Feb 24 2005 33.92 17.21

Equity Sectoral

Scheme Inception Date Return 1 yr % Return 3 yr %
SBI Magnum FMCG Jul 03 1999 53.33 36.11
ICICI Pru FMCG Mar 30 1999 43.05 27.87
Reliance Pharma Mat 26 2004 28.88 20.87

Equity Tax Planning (ELSS)

Scheme Inception Date Return 1 yr % Return 3 yr %
Canara Robeco Equity Tax Saver Mar 31 1993 24.43 12.27
Reliance Tax Saver Aug 23 2005 31.83 12.23
Franklin India TaxShield Apr 10 1999 21.36 11.79

Equity Index

Scheme Inception Date Return 1 yr % Return 3 yr %
HDFC Index Sensex Plus Jul 10 2002 21.45 7.67
Quantum Index Jun 20 2008 22.54 6.45
LIC Nomura MF Index Nifty Nov 28 2002 21.32 6.02

Hope this will help is choosing the mutual funds. Of course, before investing, ensure to check the various Fund management charges involved and other risk performance measures. Read further to understand how do you compare and evaluate MF performance measures.