The Budget reduced the charm of bond funds for short-term investors. As any dividend from bond fund is no longer tax-free and will be taxed as any other income. For your investments with over 1-year time horizon, it doesn't make a difference. By switching to the growth option of a bond fund will help reduce your tax bill, as capital gains tax remains a lower 10 percent. But for short-term debt funds, this switch has little relevance, for they are suitable only as short-term investments.
Despite the tax disadvantage, many short-term funds are being floated. These funds are pitched as a superior income earning option to a cash fund for investors with an investible surplus for 1-3 month period. This fund can be slotted between medium-term debt fund and a cash fund. With a small allocation to gilt and lower cash holding than a cash fund, they should yield 50-60 basis points higher returns with greater stability. Earlier, investors with surplus cash for 1-3 months either choose a cash fund to settle for lower return, as cash funds maintain a very short maturity profile and a low marked-to-market portfolio to generate steady returns. Or they invest in medium term debt fund, which prove to be too volatile for a short time frame.
Three short-term bond funds were launched this week. Alliance Capital Mutual Asset Management launched an open-ended short-term plan offering Growth and Dividend re-investment options. Due for launch this month itself, K Bond short-term plan from Kotak Mahindra Mutual, will invest at least half of its assets in debt and money market instruments having maturity of less than one year. And IDBI Principal will have a debt fund of each kind with the launch of a Monthly Income Plan and a short-term debt plan. The three new launches surely indicate their relevance today. Incidentally, this week the Short-term bond funds were the best performers. They posted an average return of 0.16 percent in the past seven days, while the medium-term bond funds posted an average return of 0.09 percent. But, medium and long-term gilt funds reported a loss of 0.15 percent.
Tech funds are always in the news, thanks to the volatile nature of the underlying stocks, which in turn gets affected by the unclear longer-term picture of the software sector. While a higher than expected earnings report by Infosys gave a boost to the tech funds last week, lower than expected profits of Wipro Ltd pulled them down this week. With Wipro accounting for a sizable chunk of their portfolios, tech funds on an average reported a loss of 2.09 percent for the week but managed to hold out against the 3.4 percent decline in the BSE IT Index. FMCG Funds also witnessed substantial losses on account of a 10 percent annual drop in sales of Hindustan Lever Ltd, India's largest personal care company, for the quarter ended March 31. As HLL is the largest holding of the 3 FMCG funds in existence, these schemes lost 2.64 percent as against the fall of 6.0 percent in the BSE FMCG Index.
Of the 51 equity-diversified funds, 29 are invested in HLL and 14 are invested in Wipro. An equity-diversified fund on an average lost about 3 percent over the week. Bond funds looked north during the week.
Fund Update: During the week, the market lost 147 points on the Sensex and 67 points on the broad based National Index. The key gainers during the week were Alliance Buy India (1.85%), K MNC (0.64%), Magnum Taxgain (0.63%) and Alliance New Millenium (0.42%). The major losers were Magnum Contra (-6.75%), UTI Petro (-5.43%), GIC Fortune '94 (-4.94%) and UTI Master Index (-4.30%).
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
