Debt
Income Funds
A mutual fund whose core holdings are in fixed income
investments. A debt fund may invest in: short or long-term RBI issued
Indian Government bonds, Bank Fixed Deposits & Corporate Deposits.
Investment objectives of a debt fund: Preservation of capital &
Generation of income.
Features: Debt Income Funds
|
Scheme Objective |
Aim to generate income through
Debt and Money Market Securities |
|
Options |
Growth / Dividend |
|
Load Structure |
Entry Load - NIL |
Exit Load - 1% (Varies b/w 6 Mths to 1 Yr) |
|
Asset Allocation |
Equity - 0% | Debt – 100% |
|
Current YTM |
Betw 9.5% to 10% |
RETURNS OF DEBT INCOME FUNDS IN 2008-2009
As you are aware,
Interest rates at at its peak. Indian Repo Rates were at its peak, last in
2008
|
FUND NAME |
2011 |
2010 |
2009 |
2008 |
2007 |
|
Canara Robeco Income |
7.76% |
4.90% |
6.84% |
29.95% |
6.46% |
|
BSL Income Plus |
8.34% |
3.18% |
-1.24% |
23.60% |
12.57% |
|
ICICI Pru Income Plan |
6.97% |
2.95% |
1.09% |
25.40% |
9.15% |
|
UTI Bond Fund |
11.17% |
5.24% |
-5.01% |
18.58% |
8.33% |
Current Indian Debt Market Overview
· RBI has increased Indian Repo Rates 13 times to 8.5% since Mar 2010 -
Dec 2011
· Increased interest rates has directly reduced India’s economic growth
· Dec 16th 2011, RBI kept Repo Rates unchanged, clearly indicating RBI’s
focus towards: Economic growth & Curbing inflation
· 24 Jan 2012, RBI reduced Cash Reserve Ratio by .5%; injecting Rs.
32,000 Crore in to the banking system
· RBI indicated that Interest Rate Cycle has peaked & and are likely
to reverse the cycle soon
· 9 Mar 2012, RBI further reduced Cash Reserve Ratio by .75%, further
inducing Rs. 45,000 Crore in to the banking system
Benefits of Investing in Debt Income Funds:
1. CAPITAL GAINS: Debt Income funds gives you the
opportunity to take advantage of Interest Rates being at its peak, while being
invested in RBI issued Govt. Bonds, Bank FD's & AAA rated Corporate
Deposits
2. TAXATION: Debt funds are taxed at 10% flat or 20%
with Indexation. Double Indexation Benefits available for investments made
before March 31st
3. SAFETY: Debt Funds recommended by Ethos are invested
100% in RBI Issued Govt. Bonds, Bank Fixed Deposits & AAA Rated Corporate
Deposits ONLY!
4. LIQUIDITY: In some Debt Mutual Funds, there is 0 Exit Load
after 6 months
CAPITAL GAINS ILLUSTRATION: If Interest rate drops by 1%
|
Short Term Income Funds |
|
Long Term Income Funds |
||
|
Current YTM |
9.5% |
Current YTM |
9.5% |
|
|
Time |
1.8 yrs |
Time |
5.5 yrs |
|
|
(% Change in Yield) |
1% |
(% Change in Yield) |
1% |
|
|
(% Change in Yield*Time) |
1.8 |
(% Change in Yield*Time) |
5.5 |
|
|
Total
Approx Return |
||||
|
Current YTM |
9.5 |
|
Current YTM |
9.5 |
|
(-) Expenses of Fund |
1 |
(-) Expenses of Fund |
1 |
|
|
Running Yield net of Expenses |
8.5 |
Running Yield net of Expenses |
8.5 |
|
|
(+) Return on Duration Play |
1.8 |
(+) Return on Duration Play |
5.5 |
|
|
Approx Return- Post Tax |
10.30% |
Approx Return- Post Tax |
14% |
|
INDEXATION
BENEFITS:
Indexation, like in
Real Estate, is available for Debt Mutual Funds (amount invested above 365
days). In the case of Real Estate, minimum duration for Long Term Capital Gains
Tax is 3 years.
TAXATION BENEFITS
Long-term capital gains tax (investments held above 1 year)
= 10% flat or 20% with indexation, whichever
is lower*.
Short-term capital gains tax (investments held below 1
year) is subject to Income Tax at your current income tax slab.
*Indexation, the cost of investment is raised to account for
inflation for duration of the investment. Done by using a Cost
Inflation Index released by the central tax authorities every year