Let us see what happens when a HNI wants to build a debt portfolio of his balance sheet!

If you see the post ‘all debt products’ – I have enumerated all the  mutual fund debt products..if you have not seen that post done on 4 Feb, 2014 please visit that post first…

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.

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.

Assuming you have about Rs. 50 lakhs to invest and you like to have about 50% in easy access liquid funds. This fund should have about Rs. 25 Lakhs sitting here.

Out of this you could do a STP (Systematic transfer plan) into a top Equity fund – of about Rs. 12000 a month. This will ensure that Rs. 25,00,000 does not grow too big, but it will almost NEVER fall below Rs. 25L

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.

A portion of the money could lie in this account especially if the client is sure when t

 

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

Invest in Government securities with long maturity – say 10 years or more….

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  1. Subra Ji,
    received my Retention pay of Rs 2.5L which i may not need for at least 5 months. Presently it is at my savings account. Can you suggest me a fund? So it can earn better than 4% of Savings Account Interest.
    I just Deposited 1L in PPF on Apr 3.
    BTW, There wont be any TDS on Savings account Interest even if it exceeds 10k for the financial year.

  2. liquid fund – 5 months is too short for any other fund….with a slightly higher risk you could put 0.5 in an arbitrage fund and the balance in liquid fund…

  3. Hi Subra,

    I have been trying to find the best option of park lump sum money and stagger investment via SIP in MF. To get my basic right
    1> Liquid fund withdrawal (via SIP) less than a year will be taxed at IT Rate for the amount of withdrawal and gain made.
    2> Withdrawals beyond 1 year will be taxed at 10% .
    3> Liquid funds will be a better option (tax and post tax returns) instead of FD (varying period FD) and savings combo for SIP.

    Your view would be very helpful.

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