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Analysts say debt fund appeal evergreen, current dip temporary

IF YOU are a risk-averse investor, debt funds must have been an attractive investment product. This is notwithstanding the fact that debt funds while carrying negligible risk have some charges associated with them. One often compares this with fixed deposits and one prime reason why one, in most cases, prefers debt funds to fixed deposits, is that debt funds are extremely tax efficient and give higher post-tax returns. These funds are particularly lucrative for people in the higher tax bracket. A debt fund, incidentally, is all but an investment pool like a mutual fund or an exchange-traded fund, in which core holdings are fixed income investments.

Debt funds may invest in short-term or long-term bonds, securitised products, money market instruments or floating rate debt.

The fee ratios on debt funds are on an average lower than equity funds because the overall management costs are lower.

The main investing objectives of a debt fund will usually be preservation of capital and generation of income. Performance against a benchmark is considered to be a secondary consideration to absolute return when investing in a debt fund.

Now the most pertinent question at this point of time is that if it is wise and advisable to invest in debt funds now and more so in the wake of recent RBI moves?

The free fall of rupee forced the apex bank to increase the interest on marginal standing facility (MSF) from 8.25 per cent to 10.25 per cent. This is the short term borrowing facility. This over and above the repo (rate at which funds are available from RBI), which is at 7.25 per cent. RBI has restricted the borrowing under repo to 1 per cent of the bank deposits. Also overnight borrowings for all banks put together, is restricted to Rs 75,000 crore.

And thanks to this move by RBI, debt investments are showing negative returns, wiping off gains seen in the last three months. Financial planners and advisers feel that investors at this point of time are left with two options: wait for market to stabilise, or make fresh investments to take advantage of low sentiments now prevailing.

"Debt funds' ever green appeal will not wane, for sure, but I foresee a temporary dip. Investors should look at FMPs (fixed maturity investments), as these tend to look in their portfolios. I strongly feel that actively-managed medium term debt funds may be avoided at the moment.

The market is too volatile.

One must keep watching RBI actions on a regular basis in this regard. The dollar-rupee exchange rate is also a big worry. Also, real returns will be down if high inflation continues

One must also keep in mind that liquidity of debt funds is very high. One can make redemption any day.

Usually, there are no charges for redemptions after one year. However, an exit load of 1 per cent is generally applicable if the fund is redeemed before one year. Besides, these funds are market linked and subject to interest rate and credit risks. However, chances of a default are very minimal and hence debts funds are practically safe and give positive returns, analysts think.

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