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  #1  
Old 5th July 2012, 08:57 AM
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Default Debt Funds



Can somebody please explain me what are debt funds?

I currently invest some money in FDs but read somewhere that debt funds are better than investing in FDs.

The period of investment is more than 2 years at a minimum.

I am in 20% bracket.

Thanks
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  #2  
Old 6th July 2012, 12:23 AM
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They are the class of mutual funds that do not invest in equities; the bulk of their investments are in bonds, debentures, govt.-issued securities etc. Hence they are less volatile compared to equity funds. While they are more secure compared to equity funds, the returns from debt funds aren't as guaranteed as those from FD's are.

More on this here.
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  #3  
Old 10th July 2012, 09:13 AM
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Just like equity funds, is there a possibility of losing principal in debt funds too?

If yes, can you please explain how?
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  #4  
Old 10th July 2012, 10:54 AM
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Originally Posted by jungleanger007 View Post
Just like equity funds, is there a possibility of losing principal in debt funds too?

If yes, can you please explain how?
There is a possibility, but very small.

If you withdraw your money within a few weeks, you can lose money because of exit load and short-term fluctuations in bond prices.

You can lose money if the debt that the fund has bought turns bad. Debt funds diversify a lot and usually invest in high quality bonds. Thus the credit risk is pretty low in normal circumstances.

Bonds prices fall when interest rates rise. If your fund has significant investments in longer duration bonds (10 years+) and you invest when interest rates are at the bottom, you can lose money if interest rates rise sharply.

See this article:

Can you lose money in debt funds? - Value Research: The Complete Guide to Mutual Funds
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  #5  
Old 10th July 2012, 11:26 PM
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Originally Posted by jungleanger007 View Post
Just like equity funds, is there a possibility of losing principal in debt funds too?
Sure. As Alchemist points out in that excellent VRO link, when debt fund managers get a little too ambitious like this one does, it could spell trouble.
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  #6  
Old 23rd November 2012, 11:56 AM
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Question Investing in Gilt Funds

Hi All,

I want to start investing regularly in the Gilt funds to take advantage of the downturn in interest cycle which is expected.

Does anybody have any experience with these funds & any guidance?

Thanks,
Hiren
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  #7  
Old 23rd November 2012, 01:44 PM
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Quote:
Originally Posted by hiren View Post
Hi All,

I want to start investing regularly in the Gilt funds to take advantage of the downturn in interest cycle which is expected.

Does anybody have any experience with these funds & any guidance?

Thanks,
Hiren
Hi,

I have discussed my take on this here. I believe it is better to go with dynamic bond funds rather than gilt funds.
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  #8  
Old 24th November 2012, 02:19 PM
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Thanks Prudent Investor.

Why do you think gilt funds wouldn't be appropriate? The gilt funds were suggested by a respected finance professional on his blog & hence the query.

I have very good experience with choosing equity funds however the knowledge on debt side is lacking.

Do you suggest lump sum investments in debt funds or sip mode looking at gradual decrease in interest rate cycles?

Thanks once again.

Best Regards,
Hiren
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  #9  
Old 25th November 2012, 12:06 AM
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Quote:
Originally Posted by hiren View Post
Thanks Prudent Investor.

Why do you think gilt funds wouldn't be appropriate? The gilt funds were suggested by a respected finance professional on his blog & hence the query.

I have very good experience with choosing equity funds however the knowledge on debt side is lacking.

Do you suggest lump sum investments in debt funds or sip mode looking at gradual decrease in interest rate cycles?

Thanks once again.

Best Regards,
Hiren
Hi Hiren,

I suggested dynamic bond funds as a better option. Never meant that gilt funds wouldn't be appropriate.

Even if you look at the examples of 3 funds in the post, you will see all have GOI securities as more than 50% of the portfolio.

Playing the longer term without GOI securities, we do not have that much depth in our debt markets.

The main catch here is when will be the rate cut from RBI, if you know that for sure, play it out with Gilt funds as the appreciation will be immediate.

Else trust the fund manager of the dynamic bond fund to change positions according to interest rate cycles for maximum benefit.

I choose to do the latter.

Most of these funds have hefty lock-in, hence lumpsum is always a preferred mode of entry. Also SIP is particularly suited for equity because of high volatility and expected downside, both of which are missing in debt funds.

Do share your strategy if you are playing this with Gilt funds.

Regards,
Prudent_Investor
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  #10  
Old 26th November 2012, 12:29 AM
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Thanks Prudent Investor.

Dynamic bonds will be good to get into, however I do not trust SBI as an AMC with my money. So will have to look at the other 2 options.

We can't predict with certainty when RBI will change rates however I am going with the trend that the cycle downwards is in progress & its only matter of time.

Hopefully there wouldn't be much to lose except for the stiff loads if this opinion goes wrong.
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  #11  
Old 26th November 2012, 10:30 AM
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Quote:
Originally Posted by hiren View Post
We can't predict with certainty when RBI will change rates however I am going with the trend that the cycle downwards is in progress & its only matter of time.
Bonds markets like equity markets also react much more to unexpected developments than expected developments.

If market expects a rate cut in next 6-8 weeks and a rate cut happens in next 6-8 weeks, bond prices won't really react to the rate cut, especially bonds of medium and longer durations.
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  #12  
Old 29th November 2012, 12:09 PM
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I went through this article at HDFC site. Easy to understand and neatly explained.

Mutual Fund Analysis - HDFC
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