VR Logo

The ABCs of Income Funds

I am an NRI and will repatriate by the end of the year. Please advice the best option for long-term and safe investment in bond funds. I am 57-year-old and have few liabilities.

I am an NRI and will repatriate by the end of the year. Please advice the best option for long-term and safe investment in bond funds. I am 57-year-old and have few liabilities.
Dr KVS

Bonds funds are safe but certainly not risk-free. Today, income funds or bond funds in India offer a wide variety to suit the varying needs of most fixed income investors. The universe of Indian debt funds can be broadly classified into six categories. The options are - ultra short-term or cash funds, short-term debt funds, medium-term debt funds, short-term gilt funds, medium and long-term gilt funds and MIPs with marginal equity allocation. Investors can choose from amongst these options depending on their risk-return profile and suitable time horizon.

Ultra short-term funds invest in ultra short-term securities like those issued by the government, banks and corporates. If your investment horizon is only a few days and capital preservation is of utmost importance then they are a convenient instrument to park money at short notice and are considered a better alternative to savings banks.

Short-term debt funds aims to achieve stable returns over a shorter investment horizon (less than 6 months but more than that of a cash fund). Short-term gilt funds also have a similar horizon but invest only in government securities. Medium-term debt funds invest in a variety of debt instruments. Medium-long term gilt funds are similar to short-term gilts except that these invest in government securities that are issued for long periods. MIPs take around 15 per cent exposure into equities, which acts as a kicker to returns with the rest in debt instruments. These categories are explained in much greater details on our website at https://www.valueresearchonline.com/story/fundpicks.asp.

There are a plethora of advantages, which income funds offer like market-related returns, liquidity, tax efficiency, lesser risk and lower volatility. But there are some disadvantages too, which an investor must look at while going in for these funds. Don't have the misconception that investments in these funds are risk-free because short-term swings are very likely to happen.

As in equity funds, the philosophy of not putting all your eggs into one basket applies to bond funds too. Diversify your portfolio between conservative and aggressive funds. The investment horizon in these funds should be more than a year to bear the fruits of compounded returns. The investors must have a close look at the expenses of the fund or the expense ratio of the fund as these are deducted from the returns generated. A high expense ratio can have an impact on the investor's income in the form of low returns.

If you are really looking for long-term risk free fixed income avenues and since safety is paramount to you consider some other government guaranteed options like Post Office MIP and RBI Relief Bonds. These options are comparatively safer than bond funds with equally competitive returns. RBI Relief Bonds currently have two options — one earning an 8 per cent interest per annum, which is taxable and the other one carries 6.5 per cent (tax-free) interest per annum. The interest is compounded half yearly and there is no investment limit for these bonds. The maturity period of the 8 per cent (taxable) bond is 6 years and that of the 6.5 per cent (tax-free) bond is 5 years.

Post Your Query