Kirtan A Shah, CFP® Profile picture
Feb 4, 2021 25 tweets 6 min read Read on X
A primer on 'Investing in Debt Mutual Funds' for retail investors

Do hit the re-tweet and help us educate more investors

Have also started a telegram channel to discuss investments; you can join using this link – t.me/kirtanshahcfp (1/n)
(Q1) What r the challenges of investing in deposits (Banks/Corporates)?
a. Concentration & Default Risk – Most investors invest their entire corpus in 2-3 deposits. If either of the deposits default, a large chunk of the corpus is lost (2/n)
b. Tax inefficiency – Taxed at ur slab rates. If a deposit pays 6% right now, post tax is 6% - 30% = 4.2%. This does not beat inflation
c. Illiquidity Risk – If u invest in a deposits for 3 years, to exit before that, you will be charged a penalty of 1% interest (3/n)
d. Interest Rate Risk – Specially in the current market situation where the rates r at the bottom & expected to move up, investing in deposits for 3 or 5 years tenure means locking urself at lower rates when the rates can increase in the future (4/n)
(Q2) Why invest in Debt MFs over deposits?

a. Each debt scheme of MF would invest in around 100 bonds/deposits. This reduces the concentration risk & the impact of any default risk

b. Tax – Investment in Debt MF for above 3 years, would get indexation advantage (5/n)
Tax advantage explained,

For Ex,

Fund return – 6%
Inflation in the same period – 4%
Tax to be paid only on 2% (returns – inflation)
Even if you are in the 30% tax bracket, tax to be paid is 20%
So 2% * 20% = 0.4% tax
Net return = 6% - 0.4% = 5.6% vs 4.2% in deposits (6/n)
c. Investment can be withdrawn in 1 day without any penalty

d. As these investments are managed by professionals, they can do a much better job in reducing risk & increasing returns (ofcourse there can be exceptions) (7/n)
(Q3) R there guarantees in investing in Debt Mutual Funds?
No, there are no guarantees like deposits. These investments are market linked.

(Q4) So you are saying debt mutual fund investing is risky like stock markets?
Not really. Lets try and understand how Debt MF’s work (8/n)
(Q5) How do Debt MFs generate returns?

When you invest in a Debt MF scheme, the scheme further invests in multiple bonds/deposits. The scheme generates return in 2 ways, coupon & capital gains. (9/n)
Coupon – Its same as the interest paid out by the deposits. We call it coupon in the debt market. The coupon is higher for riskier bonds & lower for less risky bonds, same as deposits (10/n)
How do I understand the credit risk in the bonds?

Look at the credit rating. SOV means government, AAA & A1+ are considered to be the best ratings in corporate bonds & the lower you go on the rating, the risk increases. AA+ & A1 has higher risk than AAA & A1+ and so on (11/n) Image
Capital Gains – Interest rates or yields like they are called & bonds value are inversely proportional. So when interest rates (yields) go up, the existing bonds fall in value & when interest rates (yields) go down, existing bonds increase in value. (12/n) Image
Consider a bond 2b exactly same as FD with the only difference being that bond trades in the market & v can buy/sell it like we do with equities

Imagine a bond v have invested in at 6% for 5 years & after our investment, the interest rates in the market ⬆️ or 🔽, (13/n)
Case 1–yields decrease to 5%

If any1 now wants 2 buy a new bond, will get it @ 5% yield bt our old bond is paying 6% yield & hence the demand 4 our bonds will go ⬆️ & the price will ⬆️. So when market yields 🔽, price of the existing bonds ⬆️, leading 2 gains in the scheme(14/n)
Case 2-yields ⬆️ in the market to 7%

If any1 now wants 2 buy a new bond, will get it @ 7% yield bt our old bond is paying 6% & hence the demand 4 our bonds will go 🔽& the price will 🔽. So when market yields ⬆️, price of the existing bonds 🔽, leading 2 loss in the scheme(15/n
(Q6) So what’s the take away so far?

a) Coupon – Lower the credit rating of the bond, higher will be the risk & hence higher will be the coupon.

AA- and above ratings (SOV, AAA, AA+, A1+, A1) are considered decent (16/n)
b) Capital Gain

(i) In a decreasing interest rate scenario, the scheme will make coupon + capital gains = Higher returns

(ii) In an increasing interest rate scenario, the scheme will make coupon – capital gains = Lower returns (17/n)
(Q7) How do I understand the extent of the capital gains & loss the scheme is expected to make?

In MF’s you will see a mention of Modified Duration (MD), it simply helps you understand the schemes sensitivity to interest rate movements (18/n)
(19/n) Image
(20/n) Image
(21/n) Image
(22/n) Image
There are 2 threads I wrote in the past on debt that I suggest you read,

Floating rate funds -

Fixed income strategies –
(23/n)
If you would like to learn in detail on “How to select the right mutual fund” to invest in, we run a 10 hours + pre-recorded online program on the same,

Details - fpa.edu.in/distancecfp.as… (24/n)
Hope the thread added value :) Hit the 're-tweet' and help us reach more investors. We have written multiple similar educative threads on personal finance. You can find them as a pinned tweet on my profile or click the link below (**END**)

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More from @KirtanShahCFP

Mar 5
RBI is getting very active & making sure it is supporting the market much faster than it has in the past

RBI announced 2 things,
- 1,00,000 cr of OMO
- 87,000 cr of USD/INR Swap

Let me explain what it means in this 🧵 (1/4)
Liquidity in the banking sector is under serious stress. On the 4th of March the liquidity deficit was ~20K cr. Liquidity has been deficit because of,

- Tax Outflows (Taking money out from the bank)
- Heavy Selling by FII’s (Taking money back)
- Lower government spending (Not receiving more rupees in the market)
- RBI Selling $ in the market (sucking out rupee liquidity) (2/4)
To increase liquidity in the banking sector, RBI is doing OMO + Currency Swaps.

(1) 1,00,000 cr of OMO

- OMO means open market operations
- In this the RBI will buy bonds (Treasury Bills) from the banks before the maturity & give banks a 1L cr of liquidity before it matures
- This will increase the rupee liquidity in the market (3/4)
Read 4 tweets
Feb 12
Let me tell you a story of the most brutal correction in India, it was the dot com bubble. Not only because markets corrected 54% but also because it lasted for 19 months.

Lets see what an SIP investor would have experienced (1/6)
If you were very smart & started your 25,000 SIP at the exact BOTTOM of the market cycle in Sep 2001 from where the correction ended & markets started going up & you stayed invested till Dec 2024, you would have invested 70 L over 280 months & today that would have become 5.50 cr. at the actual market returns. (2/6)
BUT, lets say you were unlucky & started at the TOP of the market cycle in Feb 2000 from where the 54% market correction started but stayed invested till Dec 2024, you would have invested 74.75 L over 299 months & today that would have become 6.70 cr at the actual market returns. (3/6)
Read 6 tweets
Feb 11
What’s happening with Gold & what should you do? A quick 🧵

Gold has been going up because of these 4 reasons,

(1) US trade war
(2) Central bank buying
(3) Rupee Depreciation
(4) Falling rates (1/n)
(1) US Trade War - There is policy uncertainty because of this. China, Mexico & Canada form close to 40% of America's trade partnership. Trade war leads to a risk off environment (people are scared to take risk in equity) + increase in inflation (as imports from China, Mexico & Canada becomes expensive). This led to Gold going up (2/n)
(2) Central Bank Buying - Post sanctions by US / G7 on Russia, central banks buying Gold & trying to reduce US dollar as reserves is increasing (De Dollarisation). Just the last Quarter, Central Banks bought 333 T of Gold (3/n)
Read 7 tweets
Nov 6, 2024
Bond markets are expecting higher inflation with trump winning & hence the yields are going up, not a good sign for India equity. Let me explain (1/4) Image
(1) If Trump increases duty, it is inflationary as the imports will become costly & hence yields are going up

(2) If trump reduces corporate taxes, it means more stress on the government finances, more borrowings & hence higher yields (2/4)
While FED main continue to lower rates, the rate cut cycle will reduce in an inflationary situation. Remember FED can only impacts the shorter end of the curve with rate cuts. The longer end of the curve is market determined & hence the yields are up because markets feel inflation is coming back with Trump (3/4)
Read 4 tweets
Dec 13, 2023
Continuing our Mutual Fund educational series, here’s the 4th 🧵 in the series,

Topic - “Everything you need to know about Mutual Fund Taxation”
 
Do ‘re-tweet’ & help us educated more retail investors (1/13) Image
If you prefer watching a video instead, here’s a link to the 15 minute detailed video on the same topic -
 
Do subscribe & hit the bell icon to get notified everytime we post an educational video (2/13)
In Mutual Fund taxation, you first have to be able to classify your fund either as,
 
(a) Fund investing less than 35% in Equity - This fund will get Debt Taxation

(b) Fund investing between 35% - 64% in Equity - This fund will get Debt + Indexation Taxation

(c) Fund investing 65% & more in Equity - This fund will get Equity Taxation (3/13)
Read 13 tweets
Dec 7, 2023
Continuing our Mutual Fund Education Series, here’s the 3rd thread; this will demystify the Hybrid Mutual Fund categories for you.
 
Do ‘re-tweet’ & help us educate more investors to make the right investing decisions (1/9)
(Q1) What are Hybrid Funds?
 
Hybrid funds are funds, which invest in multiple asset classes like
- Equity
- Debt
- Gold
- Preference Shares
- REITs & InvITs

With an objective to reduce volatility (vs pure equity funds) & try an generate better risk adjusted returns (2/9)
(Q2) Types of Hybrid Funds?
 
- Conservative Hybrid Fund
- Balanced Hybrid Fund
- Aggressive Hybrid Fund
- Dynamic Asset Allocation (DAAF) or Balanced Advantage Fund (BAF)
- Multi Asset Allocation Fund
- Arbitrage Fund
- Equity Savings Fund (3/9) Image
Read 9 tweets

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