How I’m Planning to Invest in Debt Funds in 2011?

by Vinaya HS on February 9, 2011

in Finance

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I had more or less settled upon how I’d go about investing in debt funds (as part of one or more of my goal-oriented portfolios) in 2011 when I happened to read this insightful article on the outlook for debt mutual funds in 2011. Coincidentally, my own research and strategy happens to be a close match.

Excerpts from the interview with my comments outside the colored boxes.

From a mutual fund investor’s perspective, I recommend the following:

For the investors who seek liquidity and want to optimize returns, we recommend the dynamic bond fund, which promises to navigate through various stages of business and rate cycles by apt and swift repositioning of its investment strategies. It is well suited for investors with a one-year investment horizon.

I probably won’t be investing in such bond funds this year since I’m going for the other two options below. This, however, seems to be a good strategy given the interest rate and liquidity scenario.

Investors with a fixed term horizon, who seek certainty of returns, should look to invest in FMPs. The current short term rates are at elevated levels and are likely to compensate for inflation in the coming months. Both short term funds and FMPs will help you beat inflation in the coming months. Investors must avoid Income funds to stay away from corporate bond spreads.

I’d already started my research on Fixed Maturity Plans (FMP) even before I read this article since I wanted them to be a core part of D’s portfolio this year. In fact, by the time this post appears, I’ll already have made the first investment in a 90-day FMP. I want to watch the interest rate scenario for some more time before committing to a longer tenure.

Temporary cash must find its way to cash funds, as the return profile for such funds have improved dramatically over the last few months. These funds deliver substantially higher returns than the other passive form of investing i.e. savings account.

Quite true. I’ve been accumulating my passive income in a cash fund over the past few months and the returns have been significantly high — way higher than what I’d have made if the funds were in my savings account. I’ll continue this strategy since I expect this good situation to continue for some more time. As I read elsewhere, being invested in cash is also a position.

How about you? Are you investing in debt funds in 2011?

Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

{ 6 comments… read them below or add one }

Shankar February 9, 2011 at 9:36 AM

Hi Vinaya,

My savings account has a feature of flexi-deposits, where in any balance amount more than 25 k gets automatically invested into a 6-month FD kind of thing. The returns are definitely better than SB account.

Can you elaborate on the cash funds. How do they match up with such auto-FDs or SB interest rates?

Anil Kuppa February 12, 2011 at 12:19 PM

@Shankar – I feel that FMPs are better than FD from the point of tax. You can google why FMPs are better than FD. But, I would like Vinaya to write an article about that ;)
FMPs do not declare the expected returns upfront. They just state the instruments they are going to be invested in.

@Vinaya- How do you invest in FMPs? Is there any online way of investing in it? FMPs are open generally for not more than 5-6 days. Do you invest in it through offline ?

Vinaya HS February 13, 2011 at 5:51 PM


That’s a good option too. The savings account that I have doesn’t offer this facility and since I’m already invested in Fixed Deposits, I started exploring the cash fund route. The returns are more or less equivalent.


Right now, I’m investing in FMPs through my online brokerage account. There’s a fixed charge (Rs 100 + 10.3% service tax) per transaction.

KK April 6, 2011 at 11:36 AM

Hi Vinaya
I stumbled across your site about 6 months back and it has been a very informative source for personal finance for me. Infact I have used your loan amortization templates to make a couple of decisions myself.
Appreciate your efforts!
Regarding FMP, I am looking at investing for a 90 day period as well. Could you let me know what resources you are using for researching the FMP funds that are currently available? Also based on your research, it would be helpful if you can highlight few funds which are good.
Keep up the awesome work!

Vinaya H S April 7, 2011 at 12:51 PM


Glad to be of help. :-)

I use to check which FMPs are currently on offer. I read the Scheme Information Document (SID) cover to cover in order to know what the objectives/strategy of the FMP are.

I generally avoid fund houses that I’m not intrinsically comfortable with and this is quite subjective. However, stick to the BIG ones and you most certainly won’t go wrong. The other thing that I do is to analyze similar FMPs that have very recently matured just to get a rough idea of the returns. For this, I use

Among the FMPs that I’m currently invested in, the one from SBI is doing brilliant!

Stock Guru August 22, 2011 at 5:46 PM

You also can watch Kotak Arbitrage and HDFC Multiple Yied 2005 Funds. Those are Arbitrage funds and Arbitrage means almost guaranteed return as they take advantage of market movement and take positions.
One more advatange is, Those are Equity funds and means if you will hold it for 1 year then return on them is TAX free which is not the case with FMP and other Debt Funds. You also can opt for Dividend(Which i think is the best) option which is also free. This fund is good option for 20-30% tax bracket person.
You will have to bear 1% chrages for early exit but Kotak is allowing you to exit in 90 days. in that case you just have to pay “Short Term Capital Gain Tax” which is 15% currently and you have to pay 30% on FDs.
I am investing in Kotak and HDFC from 2007 and dividend earned on them is investing in other mutual funds and also after 1 year, I do switch that money to other Equity scheme.
Let me know your opinions too :-)

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