Debt Funds

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Ramnikbhai Desai, an avid investor is concerned about the sluggish growth in the net asset value (NAV) of debt schemes vis-à-vis the NAVs of most equity funds. In fact, considering the not-so-encouraging growth in debt schemes, Desai preferred an equity scheme to a debt one. And there are quite a lot of investors who share Desai’s concern and prefer investing in equity schemes.

More so, taking into account the ‘herd-mentality’ mode of investing, it is perceived that debt schemes occupy only a secondary position in the various avenues of mutual funds investment. So, why is it that debt schemes, which have less but a relatively constant flow of income, are “the least-preferred mode of mutual funds investment”, when it comes to returns?

FE Investor analysed what debt scheme investments entail, various strategies used in these schemes for making monies, their performances, and delved more into what’s in store for investors looking at investing in these schemes, apart from the returns perspective.

Ideally, debt funds are of three types viz income/bonds, liquid/money market and gilts schemes. Income/bond schemes invest in long- and medium-term instruments like corporate bonds, debentures, fixed deposits, while liquid/money market schemes invest in instruments having short-term period like treasury bills, commercial paper, call money and repos.

Gilt funds invest in sovereign papers issued by the central government and the state governments. The maturity period in these funds are medium- and long-term depending upon an investor’s goals. There are other plans, too, like monthly income plans (MIPs) wherein every month a fixed amount is invested of which approximately 20% is allocated to equity and the remaining to debt.

A fixed maturity plan (FMP) is a close-ended scheme, and has an exit load, if redeemed, before the maturity period. Such schemes can have a maturity period of three months to three years. It selects an instrument, which corresponds with its maturity period. For instance, if the maturity of a scheme is one year, then the scheme will invest in instruments having one-year maturity. As the instrument will have a fixed interest rate payable on quarterly/half-yearly basis, the NAV will be on interest accrual basis.

Why debt?