Income funds are long-term debt schemes that invest in corporate bonds, government bonds and money market instruments
08-Oct-2015 •Research Desk
What are Income Funds. Are they a part of the debt category? When is the good time to Invest in them? I have ₹50,000, which I want to invest for two to three years. Where should I invest it?
- Nilesh Deshmane
Income funds are long-term debt schemes that invest in corporate bonds, government bonds and money market instruments. They are highly vulnerable to interest rate changes and are suitable for investors who have a long term investment horizon and higher risk-taking ability. Entry and exit from these funds have to be timed properly. The best time to invest in these funds is when the interest rates are poised to fall.
It wouldn't make much sense to invest in debt schemes if you are in the 10 per cent or 20 per cent tax slab. This is because long-term capital gains on this funds on investments held over three years are taxed at 20 per cent with indexation benefit. Such people can park the money in bank deposits.
However, if you are in the 30 per cent tax slab, debt funds can offer you better post-tax returns. Since we are witnessing a falling interest rate scenario (the RBI has reduced rates by 1.25 per cent this year) and you have an investment horizon of around three years, you can consider these two options: a fixed maturity plan (FMP) or a dynamic bond fund. You can choose an FMP from a reputed fund house if you want to lock-in your money for a predictable return.
If you are ready to take a little extra risk and want to benefit from a likely fall in interest rates, you can choose a dynamic bond fund. Dynamic bond funds have an actively managed portfolio that varies dynamically with the interest rate view of the fund manager. This means an investor need not take a call on interest rate movements and leave the job to the fund manager.
Some may argue that long-term debt funds (income and gilt funds) may benefit more from falling rates. However, an average investor would find it difficult to take a call on interest rate movements and time the entry into and exit from these funds.