Anybody and everybody has a view on individual stocks and the expected levels of the index in the next few minutes, hours and day; and so doessomebody else’s driver. However, it all seems surrealistic and mysterious when it comes to investing in fixed-income products. The result: take the simple way out and invest in bank deposits — when the investor does not want to take risks.
Among the individual investors (as opposed to the corporate), mutual funds are known as vehicles for investing in technology stocks or mid-cap stocks (read “ways to make a fast buck” ); but little is known about the category called debt funds or fixed income products.
The Clear Cut Advantage
Investing in fixed-income products through mutual funds carries a distinct advantage over bank deposits and post office monthly schemes in that the returns are earned by way of dividends that are tax free in the investors’ hands as opposed to interest earned on deposits which are taxable. Hence, while comparing these products it is important to check the post-tax returns — and these could vary depending on your tax slab as well.
Match the following
It is so easy to get misled by comparing returns of two investment products when the time horizons are not similar. This is especially true in fixed-income investing, as is apparent from the different returns you get on bank deposits when you vary the tenure of the deposit. Here then is a simple table which puts into perspective mutual fund fixed income schemes versus their well-known counterparts. The statutory warning that past performance is no guarantee for future performance holds true even on the downside, and that is especially true for longer tenure (medium-term in the example given in the table) debt funds.
Important factors to consider
Since the debt market does not have enough depth yet, it is important to invest in schemes that have larger AUM. This will avoid volatility on account of frequent entries/exits from such schemes by other larger investors. The expense ratios of the scheme play a vital role in determining investor returns. What was revealing was that 5 short term schemes of different fund houses, each having over Rs 2,000 crore as AUM had expense ratios ranging from 0.64% to 1.49% pa.
Of course, recent performance and pedigree of the fund manager will carry weight in selection of a debt fund. So take the starting steps, create a portfolio of debt schemes of different maturities, and of course contact your financial advisor before investing.
Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/Give-your-fixed-income-plans-an-MF-edge/articleshow/5896175.cms
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