I do monthly SIPs into equity funds of Rs 25,000. I want to invest Rs 10 lakh lumpsum in a debt mutual fund. Where must I invest? I need regular income and security of capital.
In July 2020, I invested Rs 60,000 in IDFC G-Sec Fund and DSP G-Sec Fund. I am not satisfied with the return. Should I stay invested?
Since you are looking for regular income and security of capital, we recommend investing a mix of Ultra Short Duration/Low Duration and Short Duration/Corporate Bond Funds. Ultra Short Duration and Low Duration can provide regular income while Short Duration and Corporate Bond will provide you with higher yields. The allocation between each category will depend upon the quantum and frequency of income that you are seeking.
A Bond fund will make returns through two avenues – Coupon paid by the bonds it holds plus mark to market (MTM) gains/losses in the bond prices which change as per interest rate movements.
While G-Sec funds carry no credit risk, they have a fairly significant amount of interest rate risk. The price of the underlying bonds is inversely proportional to the interest rates: As interest rates go down, bond prices go up (+ve return) and as interest rates go up, prices go down (-ve return).
The quantum of change in bond prices depends upon the duration of the fund, higher the duration greater is the quantum of change in bond prices. If the fund has a duration of 6 years, a 1% (100 bps) change in yields will result in 6% change in bond price.
Early 2020, interest rates trended lower which resulted in bond prices moving up, and thus gilt funds which carry higher durations, showed greater MTM gains resulting in funds showing good returns over this period. Since then, interest rates have remained largely range bound which has resulted in lower returns.
If this is a smaller allocation of your overall portfolio, you can continue to be invested and over an interest rate cycle you can expect to make reasonable returns. We recommend that a significant part of your fixed income portfolio is invested in shorter duration funds as core holdings. You can pick from the following funds.
Ultra Short Duration/Low Duration Funds
Corporate Bond Funds
Short Duration Funds
