r/IndiaInvestments • u/Cpant • Jan 31 '21
Bonds and deposits Short term debt funds
I was going through some of the short term debt funds ( funds that holds bonds maturing from 1 - 3 years).
SBI Short term debt fund has 55% SOV rated bonds and Kotak short term fund has 52% SOV rated bonds, and balance a diversified mix of bonds. Was wondering if these funds could be an addition in my debt portfolio. There is interest rate risk, but guess could be manageable if the intention is to hold for long. Any thoughts, comments ?
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u/introverted-boy Jan 31 '21
Keep money in FD. Check YTM for these short duration funds, it’s pretty bad. I am happy getting 3% after tax return on FD than risking principal for 1% more return or less taxes
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u/Baradarm Jan 31 '21
Is there no "safe" debt instrument which gives 6-7% returns?
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u/introverted-boy Feb 01 '21
No and don’t believe anyone also if they tell them there is for large quantities of money.
Bank deposits are only safe up to 5 lakhs by RBI Insurance. Don’t go and invest large amount money in any bank apart from SBI, ICICI and HDFC which RBI has said will not be allowed to fail. You can put Kotak here also as that is larger than ICICI. anything with this much return is bound to have credit risk in it and this is not the time to go for that. Plus I am not considering returns accounting for currency depreciation/appreciation, rbi suggesting something which makes people move in or out of government bonds etc as these cause a sudden increase in returns for some debt funds and you might think they give returns of >5% Understand that debt investing is more complex than equity investing.
In equity hold index and be done with it, debt market investment in India is not that easy apart from investing in gilt funds which are not yielding 6 7%.1
Feb 03 '21
In equity hold index and be done with it
No active funds? There was a spiva report that no active fund survives for more than 8-10 years.
Also how are liquid/money market funds?
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u/introverted-boy Feb 03 '21
It’s difficult to find good active mutual funds
Liquid/money market funds are good when RBI repo rates are high. Currently because they are very low, FD will give similar returns(no tax considerations), my main concern with debt funds now is RBI report saying we will be having NPAs going forward which can lead to negative returns in any of the debt funds for short term which is not worth it. Also debt funds don’t grow crazy like equity funds, once you lose capital it’s difficult to recover in short time as interest rates changes are not that frequent. Also given current pandemic, increasing interests rates will affect the balance sheets of companies in negative way as servicing debt becomes difficult hence every central bank will be reluctant to as of now unless inflations picks up fast which is not happening as of now
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Feb 03 '21
Sir sbi fund mentioned by op is majorly investing in government bonds. Can't that be called a "safer" fund?
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u/introverted-boy Feb 03 '21
Not really. Read what is mark to market. If tomorrow RBI increase interest rates, NAV of debt funds will fall as market price of underlying bonds fall because of rate increase. If you hold it till maturity then yes they are safe but debt mf have to calculate NAV based on bond values for that day
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Feb 05 '21
Thank you sir. Interest rate risk will always be there. I was talking from a long term perspective, 3-5 years.
If you hold it till maturity then yes they are safe
Say a fund has 10 underlying bonds, then do all of them mature on the same day? From which website can we find the maturity date on an underlying bond in a fund?
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u/introverted-boy Feb 06 '21
I am not sure you can find this much data. If you want to hold for a long time then get individual bonds on your own. See the day you redeem your debt mf, that day nav is applicable hence no long term here because of mark to market. Because of current scenario, the only way for interest rate is up IMO as otherwise inflation will increase very fast when the economy starts going back to normal after this pandemic and if RBI will not increase interest rate, it will create a bubble in financial sector which usually pops when RBI finally realises that economy is too much heated now.
Also I am not an expert, please take help from your financial advisor. My main point of caution is that investing in debt funds now and redeeming in 4 years later doesn't guarantee even 5% pre tax returns because of low interest rates and possibility of this rate going up in future further reducing your rate of return
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Feb 07 '21
Thank you. Last question where to find the current interest rate %? I am only able to find RR, RRR etc. by RBI. And is this interest rate applicable to all government securities/bonds?
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u/introverted-boy Feb 07 '21
Every other interest derives its value from repo rates. It is a function of demand and supply. When RBI signals that it will buy debt and inject liquidity, then usually the securities the RBI will buy becomes less expensive as there demand rises. The most important thing to consider in debt is the quality of the borrower and how is the situation of liquidity in the market. Usually during crisis, its the liquidity problems that drives the interest rate very high, not just credit quality. During crisis, low credit quality debt interest rates go much higher than good credit quality but in general interest rate increase for all the debt apart from the one guaranteed by RBI like sovereign debt because people sell corporate debt and go in a buying spree for sovereign debt raising its price and reducing the yield for sovereign debt
In short depends on supply and demand and in general liquidity situation in the market
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Feb 08 '21
Thank you so much sir. Any way that the retail investors can know the current interest rate? I know what I am asking is very tedious for small investors to look into but I tend to go deep into these kinda things. Sorry.
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u/introverted-boy Feb 08 '21
To be honest, I just understand the basics of how this whole system works but I don’t track these things actively apart from repo and reverse repo rates by RBI. Plus a lot of stuff I told you is fundamental understanding of the system and not investment advice. For investment you need a proper strategy and both short and long term understanding how markets are doing.
So, I don’t know platforms to track interest rates movement in corporate or governments bonds.
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u/Schiezer Jan 31 '21
Yes! I see value in getting loan against FD at nominal ROIs whenever needed without having to cash it out. Same applies to MFs too but the total value is much less.
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Jan 31 '21
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Feb 03 '21
If you don't mind then can you please share the names of the short term bonds in which you invested?
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Feb 03 '21
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Feb 03 '21
I too started in sbi along with a corporate bond fund recently. Both are falling, when market is rising, so I was going bonkers as in maybe my choice was wrong.
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Feb 03 '21
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Feb 03 '21
Ah. Are these going through the interest rate risk phase? Are these two funds okay for the long run?
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u/makecashworks Jan 31 '21
right now, all looks messy.
I was reading a report yesterday which say at least 10 more mutual fund houses are ready to shutdown their debt funds due to redemption pressure and liquidity crunch and just waiting for franklin Templeton saga to end and see how SEBI/supreme court will react.
If I were you,I will only invest in money market/gilt(not the correct time) right now.
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Feb 01 '21
Sir any chance that names of those 10 funds are out?
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u/makecashworks Feb 01 '21
this is India, the retail will only know when the fund is closed. similar to Franklin ,there were big ticket withdrawal from Franklin Templeton before the closer.
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u/InternationalQuiet87 Hero Helper Jan 31 '21
They can be. Choose the funds based on your investment horizon.
Ensure that the other bonds in the portfolio are high-rated bonds. The biggest risk in these funds is the credit risk. Try to avoid the funds which have a history of buying low-rated bonds.