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master
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Joined: 06/May/2008
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   Topic: Debt funds
Posted: 22/Dec/2011 at 10:52am |
You took the bold decision to pursue whatever you wish to, so no looking back. Follow your bliss. 
Beyond market mood swings, to be mentally at peace, I’d suggest payout from bank deposit kind assured fixed income instrument should cover most basic household bill, or at least majority, depending on lifestyle. And no better time than now to lock long dated 10-year type (before rates start softening).
For people with dependents, living entirely out of equities can sometimes be treacherous unless corpus size is really large & dividend sensitivity gives adequate safety margin. Remember in terms of equity taxation, both div & ltcg, it’s most favorable at the moment, and who knows some policy tinkering in future…
I feel a short bear phase from Oct-08 to Mar-09 gave somewhat misleading lessons, since we know bearish or flattish markets can last far longer than 6 months, and reasons follow.
Best wishes,
Edited by master - 22/Dec/2011 at 11:05am
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smartcat
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Posted: 22/Dec/2011 at 11:14am |
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Bank FDs are illiquid and is not suitable for paying bills, unless you love to visit your local bank every month to break FDs.
Living off dividends alone also has a few disadvantages. For one, about 60% - 80% of your earnings will flow into your bank account in june/july/aug. Remaining months are mostly "dry days", unless you own a million stocks like I do. Secondly, depending on the type of stocks in your portfolio & their financial performance, the dividend income could fall the next year.
Best option would be to keep 25% to 75% (depending on your requirements & risk profile) of your networth in short term debt MFs - which are mostly risk free, offer liquidity in 2 days with a few left clicks, scrolls and right clicks of the mouse button and offer returns equivalent to one year bank FD.
Edited by smartcat - 22/Dec/2011 at 11:20am
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master
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Posted: 22/Dec/2011 at 11:27am |
Originally posted by smartcat
Bank FDs are illiquid and is not suitable for paying bills, unless you love to visit your local bank every month to break FDs.
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1. One can always opt for quarterly pay-out in FDs. Point i made was to lock in long maturity rates which are at a high, if you've to break them whole purpose is defeated.
2. Most Debt MFs do not insulate you from interest rate risk or credit risk for that matter.
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smartcat
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Posted: 22/Dec/2011 at 11:38am |
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Masterji, short term debt MF's whose average maturity is 3 to 6 months offer good insulation from both interest rate & credit risk. There are many short term debt MFs that has had no negative quarter for 10 to 15 years. If you look at money market funds (which are yielding 9% per annum right now by the way), they never have had a negative month either. And then there are floating rate funds which are 100% insulated from interest rate risk.
And they are credit risk free because they mostly invest in PSU bonds or that of large banks. Anyway, credit risk curve falls drastically when the investment duration is this short.
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master
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Posted: 23/Dec/2011 at 12:04pm |
1. Smartcat ji, please see returns generated by well rated Debt MFs over 5 years or more, very few of them given > 7-9% for longer periods.
2. Expense ratio will vary from 0.25 to 2.25%, this can again fluctuate when the fund manager cries or his marketing expenses shoot up.
3. One can't be sure of choosing the best fund (which is known in hindsight when it's late), don't be misled by ratings.
4. You don't come to know of the credit risk in their portfolio, they hold chunk of unitechs, suzlons & vague nbfcs if you're ok with it.
5. What's the guarantee debt mf selected by you will do double digit return in next decade. You simply cannot be sure.
6. For non-salaried who can do tax planning, 10-year bank FD return of 9.50% will work out far superior to most debt MFs with all above ifs.
7. You have an entire asset class of equities to take all the risks, some part of portfolio needs to rest in peace without any management.
Edited by master - 23/Dec/2011 at 12:08pm
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sai8
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Posted: 23/Dec/2011 at 12:08pm |
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Any idea,how liquidbees work ?I was told that it is like liquid fund,& daily new units will be added to your demat a/c & returns are abt 6.5 p.a,but then how the tax will be work out ? & how the brokers are charging as brokerage ? Thanks in advance.
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smartcat
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Posted: 23/Dec/2011 at 12:35pm |
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OK I'll admit that you have to do some homework when it comes to investing in debt MFs - just like you would do if you were to invest in equities, but with a much smaller learning curve. For somebody who wants to live off investments, it should not such a big deal - learning how to invest in debt MFs.
1) If debt MF's have not given 7 - 9% over a long period of time, it pretty much means no bank FD investors or very few bank FD investors have got more than 7 - 9% over the same period of time.
If a bank FD investor can "time" the interest rate cycle by locking in with a 5 year deposit at 11% PA, you can do the same by investing in a long term gilt fund at the same time. You hold the long term gilt fund for 5 years, and your returns will match or exceed that of the 5 year bank FD. Eg: Prudential ICICI long term gilt has a 5 year CAGR of 11.1%
But if a bank FD investor has invested in a bank FD at 8% for 5 years, and RBI increases the interest rates, he has to run to the bank to break the bank FD. Meanwhile, a floating rate debt fund investor can enjoy higher interest rates in his fund without any "legwork".
2) Expense ratio for debt MFs are mostly 0.25%. Only equity funds charge 2.25%. Yeah, there could be exceptions.
3) Go for the Birla fund house and you can't go wrong when it comes to debt MFs. For a full time investor, it's not difficult to find the right type of fund or the wrong type of fund house.
4) Go to valueresearchonline & look at the portfolio of each fund. I have put my debt portfolio online @ valueresearchonline.com and this is what it shows me -
P1+ Rating - 61.73% (highest rating by CRISIL)
Treasury Bills - 10.73% (Risk free)
Cash & call money - 9.39% (risk free)
AA+/AA/AA- - 7.54% (Investment grade rating by ICRA)
AAA Rating - 6.66% (highest rating by ICRA)
I know there are no suzlons/unitechs in my portfolio.
5) If RBI keeps hiking interest rates, my debt MF portfolio is guaranteed to give me double digit returns in the next decade. If RBI lowers interest rates, it will be in single digits.
The returns from both Bank FD & Debt MFs mostly depends on what RBI does.
6) Not sure about the tax angle.
7) If you are an independent investor, there should be no Rest In Peace part of the portfolio. Else, you will soon see RIP board on your financial grave! Full time investors should & can manage all parts of their portfolio for the best risk adjusted returns.
Edited by smartcat - 23/Dec/2011 at 12:38pm
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master
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Posted: 23/Dec/2011 at 1:55pm |
Smartcat ji, you can have a look at expense ratio of many debt funds here, likewise for gilt & other categories, there are number of them > 1%, some > 2% also, which is a shocker.
On long period returns, one of the good funds Birla dynamic bond which is 4-star rated by same site has expense ratio of 0.88% and returned 8.07% since launch in 2004. Many bank fd of long tenor at that time yielded higher. And 2004 was one of those years where bond funds have "outperformed". There's lot of difference between theory & practice.
For their overall performance, see this article where bank FDs have beaten MFs in all years except 2004 & 2009 (not that we need to see articles, any longstanding investor will tell this).
Edited by master - 23/Dec/2011 at 2:32pm
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