The big question is
that: Is it the right time to buy debt
schemes? Which is the better choice? At the same time getting the tax benefits
all in one go ? Now the distributors as well as the mutual fund houses are
promoting the schemes .Are debt schemes a better alternative to the fixed
deposits in the banks , although we have to analyze the risks which they carry.
One thing is for sure that the debt schemes are market linked instruments just
like any other mutual fund scheme and the returns from these solely depends on
when you buy or sell. There are certain things like research and expertise
which the advertising and promoting companies lack and very sadly the fund
companies also do not promote and this is where our company vps advisory helps
you out. Even the Finmin has emphasized to change the taxability of the debt
schemes, so now the question is that are the debt schemes still worth
considering .
First of all the bank FDs
are different from the debt schemes just like the ice and the ice-creams. The
bank FDs offer a safe and secure income and also offers the protection of the
principle amount ,but they are taxable where as the debt schemes are market
linked and carry the interest rate risk and this is the reason that at
sometimes the returns can be really low and at times even towards the negative
.Until now the debt schemes offered huge tax benefits but after this year’s
budget the income generated through debt schemes for holding period of less
than three years would get the same treatment as that of the banks FDs.
So one should look for two
things one invest in the top performing schemes and two understand the interest
rates cycles..Achieving the both is a bit difficult for the average saver,
however analyzing the interest rates is really tough even for the experienced
investor .The bond prices and the bond yields move inversely ,if one is higher
than the other is lower ,therefore when you invest when the yields are higher
and exist when the yields fall ,than you make better returns and of course
better returns than the returns than by the equities .And on the contrary if
you buy at the bottom of the interest cycle and sell when the yields go up than
you end up in a loss..The price of the long term bonds are more sensitive to
the interest rate movements as compared to the short term bonds and this only
shows that the income schemes which have longer duration are riskier than the
short term debt schemes.
To understand bond , bonds are nothing but a
form of debt .Bonds are loans but you serve as a bank .You loan your money to a
company ,a city or the government who in turn promise to pay you back in full
with regular interest payments .
A city may sell bonds to raise money to
construct a bridge ,while a government issues a bond to finance its spiraling
debts .How long you hold the bond or how long you lend your money to the bond
issuer also comes into the play ,for example a five year against one year bond
pays higher yields because your money is engaged for a longer period of time
.The interest rates probably have the single largest impact on the bond prices
because as the interest rates rises the prices of the bonds fall ,that’s
because when hen the rates climb the new
bonds are issued at a higher rate thereby making the existing bonds with
lower rates less valuable ,and if you hold into your bonds until maturity it
doesn’t matter how much the prices fluctuate because your interest rate are
fixed when you had bought them and when the term is up you will receive the
face value ie the money which you initially invested , but you need to sell
your bond in the secondary market before it matures ,you could get less than
your original investment back.
Initially the inverse
relationship among the interest rates and the bond prices may appear to be
illogically ridiculous ,but upon second look it makes sense for example a bond
is trading at 95 and has a par value of 100 paid at maturity in one year ,the bond
rate of return at the time is 5.25%(100-95/95) is 5.25% appox,.For a person to pay Rs 95 for the bond
he will be happy to receive a 5.25% return .But the satisfaction with this
return depends upon what else is happening in the stock market .If the current
interest rates were to rise given the newly issued bonds a yield of 10% ,thus
bond yielding 5.25%would not only be less lucrative but would also be out of
demand ,and to attract demand the price of pre existing coupon bonds would have
to decrease enough so as to match the same return yield by prevailing interest
rates So do choose wisely .