Your Ultimate Guide to Investing in Debt Funds in 2019

Do you want to turn your dream of backpacking across Europe, into a reality in the upcoming years? Then to realize that goal, one of your 2019 resolutions should be to invest in debt funds.

Debt funds are predictable financial instruments that give fixed-income returns and appreciation on your investment. And the returns can make the Europe trip totally feasible.

So how do you decide which debt funds are the best for you? By reading our comprehensive guide of course!

So, let’s dive deep into them, without any further ado!

1) Gilt Funds

Gilt funds invest in government securities and are among the riskiest debt funds because of their sensitivity to varying interest rates. The principal maturity period can range from 10-30 years. The lower the interest rates, the higher are the returns. Even a 1 % fall in interest rates can give returns of 15-16 per cent!

When should you invest in Gilt Fund?

  • When you have a long-term investment horizon of around 10 years
  • When you want to invest in government securities
  • When inflation is high, as this will deter the RBI to increase the interest rate.

The Best Gilt Fund–  SBI Magnum Constant Maturity Fund

Since its inception in 2000, its average Compound Annual Growth Rate Performance (CAGR) has been 7.8 percent, giving steady returns to its investors. Its Net Asset Value (NAV) has been hovering between 12.85 and 13.60 (in rupees). The maturity period is generally 10 years with a minimum investment of Rs 5000.

2) Income Funds

This is an efficient alternative for fixed deposits. It is perfect for those who have some surplus cash and want to supplement their source of income. And especially useful for retirees to supplement their pension, students trying to pay education debt, or people paying any sort of EMI.

It gives a return of 7-9%.

When should you invest in Income Funds?

  • When your investment horizon is 1-3 years
  • When you have surplus cash
  • When you need a secondary source of income
  • When you want a higher return alternative to a fixed deposit

The Best Income Fund –  Franklin India Income Opportunities Fund

It has been rated as the best income fund among its competitors. You have enough historical data to review its performance since its inception in 2009. If you do wish to invest in this fund, you can expect a return of about 7 percent after 1 year. If you stay invested for longer periods, say 3 years or 5 years, you can expect interest rates to hit 8 and 9 percent, respectively.

3) Short-Term funds

These are ideal for you if you want to invest for 6 months to 1 year. Hence, the name short-term funds. Returns are inversely dependent on interest rate fluctuations and these funds invest in Commercial Paper (CPs) and Certificate of Deposit (CDs).

They tend to offer you greater post-tax returns in comparison to other non-equity funds for the same tenure. They will help you meet your financial goals and give you a balanced portfolio. 

When should you invest in Short-Term funds?

  • When your investment horizon is 6-12 months
  • When you want great post-tax returns
  • When you want an alternative to fixed deposits if investing for more than 3 years

The Best Short-Term Fund: Franklin India Short-term Income Plan Retail Plan Direct-Growth

If you wish to invest your money for around 6-12 months and get great returns, this is the fund you bank on. You can get returns of around 5.32 percent in 6 months and about 8.02 percent in a year. It has the highest returns among its peers in the category and is rated very highly.

4) Liquid Funds

If you are looking for a low-risk short-term alternative to savings accounts to park your money, then liquid funds are the way to go.

The maturity period is generally between 60-91 days and the ROI iis around 7-9 percent. Since the period of investment is so short, the chances of interest rate fluctuations are extremely low.

When should you invest in Liquid funds?

  • When your investment horizon is 60-91 days
  • When you need an investment fund which can be easily encashed
  • When you want to park some money as an emergency fund

The Best Liquid Fund: Baroda Liquid Fund – Direct Plan

Invest a minimum of Rs 5000 to eke out returns of 1.90 percent over 3 months. This is a great fund for you to grow your emergency corpus and is rated the best in the liquid fund category.

5) Fixed Maturity Plans (FMPs)

If you are looking to invest in debt funds but eliminate the risk associated with interest rate fluctuations, fixed maturity plans are made for you. They have a fixed maturity period usually around 3-7 years and a fixed rate of interest around 8-8.5 percent.

When should you invest in FMPs?

  • When your investment horizon is 3-7 years
  • When you can afford to keep funds in a lock-in period
  • When you want high returns after taxes due to indexation benefits.

The Best FMP: DHFL Pramerica Short Maturity

Since its inception in 2003, this fund has been a consistent performer in this category. If you are willing to park your funds for 5 years, you can easily get returns of 8.19 percent. If 5 years is too long, even a 3-year investment period can give an impressive 7.37 percent return.

With a lot of historical data to track its performance over the years, this is one maturity fund which can reap you great dividends.

6) Monthly Income Plans (MIPs)

A disclaimer here – the name of this plan is misleading. It does not give you a guaranteed monthly income.

However, they are perfect funds for you to invest in – entail low risk and generate high returns and have generated 10-12% of returns, in the past 5 years.  As in all mutual fund schemes, the returns are dividends based on profits. The majority of your portfolio is concentrated in debt securities such as debentures, corporate bonds, and public securities.

When should you invest in MIPS?

  • When you have an investment horizon of around 5 years
  • When you want to invest in practically risk-free equity funds
  • When you want some additional income on a monthly or quarterly basis
  • When you are investing for the first time in the market
  • When you wish to meet some of your financial goals such as buying a car or pursuing higher studies

The Best MIP: Aditya Birla Sun Life Regular Savings Fund

With average returns of 9.57 percent since its inception in 2004, this is among the best performing funds in this category. If you invest for 5 years in this fund, you can get as much as 11.51% in returns. Plus, as in all funds in this category, the investment is extremely low risk and suitable for pursuing your long-term financial goals.

In conclusion, it is time for you to seriously consider debt funds as a profitable, low-risk investment option, for fulfilling your financial dreams. Use our guide to make a well-researched new year resolution for 2019 which can be realistic, achievable, and profitable for you.

Author: Samant Sikka-Chief Dreamer & Founder, Sqrrl.in

This piece has been written by Samant Sikka, Chief Dreamer & Founder of Sqrrl – a personal finance, fintech venture targeted at young Indians helping them improve their relationship with money ultimately helping them Save, Invest & Prosper!!

Samant has been a student of financial markets & human behavior for 20+ years helping investors, institutions, and advisors. He has vast experience across Strategy, Sales, Business Development & Advisory Roles with stints at Axis Asset Management, Goldman Sachs, Franklin Templeton, AIG, and Darashaw & Company.

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