Let us see what happens when a HNI wants to build a debt portfolio of his balance sheet!
Why only a HNI? Simply because a not very rich person may be happy with 4-5 PPF accounts (into which he can invest about Rs. 2-3 lakhs a year), some bank fixed deposits, etc.
However for a HNI, he has to look at the following assets:
Savings bank account, bank fixed deposits, PPF, Tax free bonds, taxable bonds, and a variety of debt funds from the insurance basket.
The mutual fund basket products are: liquid fund, ultra short term bond fund, short term bond fund, income fund, gilt fund, and FMP.
Assuming that the former set of products are well known, let us look at the debt offering from the Mutual fund industry. What distinguishes them is the DURATION of the fund schemes. Here we are ranking them from least duration to highest duration:
1. Liquid fund:
A fund that everybody should have. This should be like your savings bank account. Whenever you have money which you think is excess it should lie in this account, in the GROWTH mode. Unlike your savings bank account, this account gives you CAPITAL GAINS and hence you will pay lesser tax – say 10% instead of 30% that you pay on the savings bank interest. Also the returns could be greater than a savings account – but it could be lesser than the return you could get from a bank fixed deposit.
2. Ultra short term bond fund:
This has a greater duration than a liquid fund, but lesser than the other funds mentioned here. If you have a time duration greater than a few days – say a few months – 100 days – this fund could be a better option compared to a liquid fund. However the returns on this fund maybe very close to a liquid fund, and may not really matter. However if you know that you require the money after 130 days it might make sense to be in an Ultra short term bond fund.
3. Short term bond fund:
When you have money for slightly longer duration of say 12-18 -30 months you could look at this fund. Obviously this fund could give a higher return than the earlier 2 funds, but now the funds start getting a little riskier. When Interest rates go UP bond funds lose VALUE. How much value they lose depends on the ‘duration’ of the fund. The first 2 funds have a very low duration, hence the impact is minimal. However the short term bond fund could lose some value. There is absolutely no need to panic – you have a 30 months view, so there is a good chance that the ‘notional loss’ could be made up.
4. Intermediate bond fund (upto 6-7 years duration)
Funds with higher maturity! this is likely to give you a good return, but carry a higher risk when interest rate changes.
5. Long bond fund (more than 8 years duration)
These funds invest in corporate bonds with longer duration. As India does not have many instruments in this genre…some portion of these funds go into GILT – Hdfc Income fund has about 50% in gilts! These funds are very safe from a default point of view, BUT VERY RISKY from any adverse movement in the interest rate in the country.
6. Gilt and Long tenure bonds
If you have a real long term view – then you can look at gilt funds with say 15 years duration. This is the riskiest set of bond funds! However if interest rates go down these funds will go up the maximum. For just a slight fall in interest rates you could see a fantastic jump!
So a HNI has to build a portfolio with a little of all of this – and hope to dynamically be in the best combination at any point in time. Or he could be in a Dynamic Bond fund…..
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