Your Fund Portfolio

- C Visalakshi

I assume the 25 per cent of investments you have mentioned is to meet your short-term goals. As your expected returns from that would be around 4 per cent, it is advisable to park this money in overnight funds. Overnight funds are considered to be of the lowest risk among debt funds, as they invest in securities with residual maturity of around a day, such as repo, tri-party repo (TREP), certificates of deposit, commercial papers and treasury bills.

But these funds prefer TREPs as they enable efficient short-term borrowing or lending. These funds carry very low credit risk as the default risk in TREPs is very low. Further, given their one- to three-day maturity, the interest rate risk is almost nil.

The returns delivered by overnight funds are more or less equal to RBI’s repo rate, which currently stands at 5.15 per cent. The overnight funds category (regular plans) has delivered returns of 5.2-5.8 per cent (pre-tax) over the past year. UTI Overnight and SBI Overnight funds are good choices. Invest in their growth plans for greater tax efficiency.

Understand the risk

Debt funds are susceptible to risks associated with fixed-income securities such as interest-rate risk and credit risk. Over the past 15-18 months, a spate of corporate bond downgrades and defaults have impacted many debt funds. Bonds issued by IL&FS, DHFL, Essel Group and Reliance ADAG were downgraded sharply. This led to mutual fund companies marking down such distressed assets in the portfolio of the schemes that held them. This resulted in a significant drop of their net asset values (NAVs). Some debt funds registered around 50 per cent negative returns in a day.

Given that the credit-quality issue in debt instruments has been persisting, you can consider debt fund categories that focus on high credit quality and short- to medium-term maturities. You can choose debt schemes which have diversified allocation to different types of debt instruments that help mitigate credit risk.

For long term

For long-term plans, you can consider investing in Aditya Birla Sun Life Corporate Bond fund, IDFC Dynamic Bond Fund and Axis Banking & PSU Debt Fund. Aditya Birla SL Corporate Bond invests at least 80 per cent ofi it corpus n high-quality corporate bonds rated AAA and AA+. Its three-year compounded annual return (CAGR) over the past five years was 7.4-10.6 per cent. Low sector concentration and spreading portfolio holdings across 140-188 debt papers (in the last one year) have diversified the risk. The fund has been rated five-star by BusinessLine Portfolio Star Track Mutual Fund Ratings .

IDFC Dynamic Bond has been investing solely in the highest-rated debt instruments (AAA and A1+) over the past five years. This mitigates the credit risk in the fund's portfolio, but may generate relatively lower returns. However, an efficient duration strategy has helped the fund deliver category-beating returns across time-frames.

Its three year CAGR over the last five years was between 5.8 and 12.9 per cent. The fund has been rated four-star by BusinessLine Portfolio Star Track Mutual Fund Ratings .

Axis Banking & PSU Debt invests at least 80 per cent ofi it corpus n debt instruments of banks and public sector entities. Their debt-servicing and repayment track record has been good so far. Its three-year CAGR over the last five years was 7-9.3 per cent. The fund has been rated five-star by BusinessLine Portfolio Star Track Mutual Fund Ratings .

For taxation of debt funds, a holding period of 36 months or more is considered long-term, and long-term capital gains ( LTCG) tax is levied at 20 per cent with indexation benefit on the gain.

A holding period of less than 36 months is defined as short-term and STCG tax is charged as per the investor’s tax slab. In dividend plans, there is a dividend distribution tax (DDT) of 29.12 per cent deducted for individual investors.

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