Debt Fund: Is it for You?

Really. Do you need them?

You can tame them to suit your needs. They come in four dimensions and create a web of opportunities: Maturity, Secured or not, Quality and Coupon.

If you segregate GOI bonds and Private issue and then classify, you get further one more dimension.

Today in Indian markets you get call money to dated securities of any term upto 20 years (GOI bonds of course).

The private issuers bring to market secured debt or unsecured debt depending upon the market conditions for raising funds. Secured debt enhances its acceptance to the investor. In case of default the investor has access to the asset to which the loan is linked.

Credit rating agencies attribute alpha-numeric symbols to denote the credit worthiness w r t that bond only and depending on the market situation at that time. It is a moving target. As time expires and business take a down turn, down grading can happen and vise versa. For example, the Essar oil bonds were down graded in the later part of 90s. Tata Motors debt was rated investment grade B (2008) which is not very far from junk.

Coupons play the rest of the fiddle on the price in response to market changes of interest rates, inflation and exchange rates.

Bond Funds help you buy into a risk adjusted portfolio of bonds w r t all of the above. You still bear certain risk. A known risk can be managed; Not an unknown one.

The various disclosures SEBI MF Regulation has brought in help in understanding the portfolio and thereby the risk in the combo offered by the Debt Fund.

Though gilt funds are free from default risk, they suffer from market risk. So your NAV may get affected by the changes in exchange rate or inflation rate impacting the prices of the GOI bonds depending on the Maturities and Coupons.

The concept of Duration help you to know how much impact the portfolio will take when interest rate changes by a given percentage. but in life not everything happens in tandem. Certain times, aberrations occur in the market, which your duration equation would n't have captured.

You can use Liquid funds for Emergency use. A MIP for regular income. A short term debt fund for parking temporary needs pending deployment and many more . One needs to look at Portfolio, Duration, Expense ratio, Fund Size and The Management itself among other things.

Other alternative possible is splitting traditional investments and MF products in an appropriate ratio to suit your size of the cake. Generally it is said that you can look at 1/3:1/3:1/3 among Traditionals :MF debt schemes: MF equity schemes or Dividend Yield Equity Shares. Then modify your allocation to suit your cash flow needs.

Other interesting readings :

1. Greece fixed; what is in for you?
2. Does your Money Work for You?
3. MIPs from MFs
4. After USA, it is the turn of Europe..
5. Planning for Cash, Savings...