[digitalnirvana]

@SmartCat at the outset I apologise because you have answered this already, but for a pseudo STP from liquid cash to Equity over say a year or two year period, would it be better to keep that cash in a Gilt fund or Liquid fund? And for an approximately 50:50 split between Equity and Debt, are Gilt funds ok?

[SmartCat]

Originally Posted by digitalnirvana

@SmartCat at the outset I apologise because you have answered this already, but for a pseudo STP from liquid cash to Equity over say a year or two year period, would it be better to keep that cash in a Gilt fund or Liquid fund?

For STP strategy, liquid funds are better.

And for an approximately 50:50 split between Equity and Debt, are Gilt funds ok?

For asset allocation strategy, gilt funds are better. That's because whenever there is a financial or economic crisis, gilt funds shoot up in value (because economic activity contracts and RBI lowers interest rates).

Eg: 2008 to 2009 (Great Financial crisis)



2020 to 2022 (Covid crisis)



So Gilt fund partly hedges your equity portfolio. It is even better if you add Gold to the mix (for eg: 50% Equity MF, 25% Gold ETF, 25% Gilt MF)

[srvm]

Originally Posted by SmartCat

....
Would 20 years be considered "long term"?
.....

Originally Posted by saket77

Although SmartCat has posted the illustration, at the cost of repetition, I would say that if you check the FD returns for last 7-8 years, then obviously it won't be 7% either. And we have already peaked at the interest rate of this cycle again- so most likely this return won't be 7% again if you consider 5-6 years in future. Now if you compare the returns from Liquid Funds to FD on retrospective basis for similar periods, you will find that both will move in tandem with each other.

Agree with you both.
Don't want to sound argumentative. But please, do you expect a Sr. Citizen to have a 20-year 'long-term' view? I think it is reasonable to expect a 5-10 year view. (OP was asking investment options for a Sr Citizen)

And in the preceding 5-10 years, FD interest rates (for Sr Citizen and SCSS) have been comfortably higher (1-2% more) than returns from Liquid funds. Also, if the investment period is >3 years, one might actually consider other debt funds including Gilt funds instead of Liquid funds.

[ajmat]

Any feedback on Incred Capital Financial Services Ltd – Market Linked Debentures?

These are Market Linked Non-Convertible Debenture where the principal is protected. This will be pegged against the NIFTY 50, this is for 3 years, 2 months.

[DigitalOne]

Originally Posted by SmartCat

For STP strategy, liquid funds are better.

What about arbitrage funds as the source of STP? You get Liquid funds like return with lesser taxation than liquid funds.

[vaibhav_a_a]

Originally Posted by ajmat

Any feedback on Incred Capital Financial Services Ltd – Market Linked Debentures?

These are Market Linked Non-Convertible Debenture where the principal is protected. This will be pegged against the NIFTY 50, this is for 3 years, 2 months.

As a company, Incred is fine. They have also had a rating upgrade via Crisil so you *should* get your capital back. Personally, among all agencies, I take CRISIL and Ind-Ra (Fitch India) ratings a bit more seriously than other agencies.

I cannot find the product note or IM for the MLD you've mentioned so please share it if you have. One needs to look at the calculation for the final payout - i.e. what level the underlying instrument needs to be to pay you anything.

In general, though, the massive advantage of MLDs was removed in March 23, with the budget that year. Prior to that, MLDs were taxed at the LTCG rate. Post that, it became STCG, so the charm went away. https://www.taxmann.com/post/blog/ma...of-finance-act. I got turned off the MLD gravy train post that episode - secured bonds work just fine.

[SmartCat]

Originally Posted by DigitalOne

What about arbitrage funds as the source of STP? You get Liquid funds like return with lesser taxation than liquid funds.

Should be fine, but I'm not comfortable with too much money invested in arbitrage funds. Discussion on arbitrage funds (multiple pages):
https://www.team-bhp.com/forum/shift...ml#post5823553 (Investing in debt funds)

Originally Posted by ajmat

Any feedback on Incred Capital Financial Services Ltd – Market Linked Debentures? These are Market Linked Non-Convertible Debenture where the principal is protected. This will be pegged against the NIFTY 50, this is for 3 years, 2 months.

You probably mean something like this:



- They are called 'structured products' and use a mix of bonds & derivatives to achieve the goal of principal protection plus NIFTY returns.

- However, the "principal protection" part comes with a tiny star and fine print. Under certain circumstances, you can lose the entire capital, despite the principal protection promise.

- That's because they invest 90% of your money in high yield bonds. Typically in tier 2 or 3 NBFCs. The remaining 10% of your money is used to buy NIFTY call options.

- Since most of your money is invested in high yield high risk bonds, these debentures will themselves have a credit rating. So check the credit rating before investing. If it is AA or lower, this investment carries significant risk, especially if there is some kind of global financial crisis.

[DigitalOne]

Originally Posted by SmartCat

You probably mean something like this:


- However, the "principal protection" part comes with a tiny star and fine print. Under certain circumstances, you can lose the entire capital, despite the principal protection promise.

Looks like blatant mis-selling to project it as 'Guaranteed Returns' if the underlying securities have market and credit risks. Also quoting absolute returns (22.6%) rather than CAGR is downright misleading, to put it mildly.

[vaibhav_a_a]

Originally Posted by SmartCat

- However, the "principal protection" part comes with a tiny star and fine print. Under certain circumstances, you can lose the entire capital, despite the principal protection promise.

A PP MLD from a major company should do the PP part just fine. Probably the only circumstance you'd lose the capital is if the company folds up. If you look at the illustration you've shared, even if nifty tanks to 16K levels they are still promising a 22% cumulative return. Not great but certainly not a scenario of losing capital.

Originally Posted by DigitalOne

Looks like blatant mis-selling to project it as 'Guaranteed Returns' if the underlying securities have market and credit risks. Also quoting absolute returns (22.6%) rather than CAGR is downright misleading, to put it mildly.

You are partially right about your second point - its more marketing to me, than mis-selling. The guaranteed returns though should hold as the illustration says the higher of the two - so the issuer is obliged to pay one of the two. Back in the day, these returns were attractive as you paid LTCG and FDs were paying 6% or so, and one easily beat FD returns. So it used to be an instrument for the wealthy who would park excess funds (min ticket size was 10Lac back then, it was lowered to 1 lac in 2023)

[SmartCat]

Originally Posted by vaibhav_a_a

A PP MLD from a major company should do the PP part just fine. Probably the only circumstance you'd lose the capital is if the company folds up.

When Edelweiss or Incred offers a structured product, usually your capital is not invested with them. They are just marketing & then managing the portfolio. So Edelweiss/Incred credit rating does not matter.

What matters is credit rating of the debenture - that needs to be checked. That's because the capital is usually invested in bonds from third party NBFCs, which offer 12% pa kind of returns on bonds. In this case, the 22% absolute returns (or 5% pa annualized) is coming from these high yield bonds. Higher the guaranteed returns, higher is the credit risk.

Usually, these investments will turn out OK. It's only major financial crisis (like in 2008 or 2020) that trips up many of these structured products, because the underlying NBFC where you money is invested in, ends up in trouble.

But still, investors need to be aware that there is no free lunch.

[vaibhav_a_a]

Originally Posted by SmartCat

When Edelweiss or Incred offers a structured product, usually your capital is not invested with them. They are just marketing & then managing the portfolio. So Edelweiss/Incred credit rating does not matter.

What matters is credit rating of the debenture - that needs to be checked. That's because the capital is usually invested in bonds from third-party NBFCs, which offer 12% pa kind of returns on bonds. In this case, the 22% absolute returns (or 5% pa annualized) is coming from these high yield bonds. Higher the guaranteed returns, higher is the credit risk.

I checked the MLD rating for Incred before I posted. FYR -

https://www.crisilratings.com/mnt/wi...RR_339118.html

If you want to feel even ''safer'' then look at issued MLD value (in annexure of the ratings, also available in the IM) versus MLD value for which rating is given. Its idle research for me as am not looking to park more funds in MLDs now.

In the case of MLD, the issuer assumes the risk instead of you managing the risk by investing in the underlying asset (smaller NBFC NCDs as you say) so your point about rating of underlying debenture determining ability to payback is actually not valid.

Institutional investors have better access to information about fixed-income instruments such as bonds and can buy and sell to cut down risk and generate a return for their investors.

[vaibhav_a_a]

Since there seem to be quite a bit of confusion about MLDs, I thought of sharing some key points.

1. MLD is a structured product and a part of debt category and SEBI calls them ''different'' and requires additional disclosures to be made to investors by the issuer - broadly along valuation, underlying matrix and premature redemption etc.

2. There are clear SEBI guidelines about this product. The last circular for debt products that contains guidelines about MLD was issued in 2022 April. Link to the same - https://www.sebi.gov.in/legal/circul...ha-_58060.html

3. Among other points regarding disclosure, the pertinent one is : "A risk factor shall be prominently displayed stating that in case of principal/ Capital Protected Market Linked Debt securities, the principal amount is subject to the credit risk of the issuer whereby the investor may or may not recover all or part of the funds in case of default by the issuer" - so it is clear that investors need pay attention to the rating of the MLD issuer and not to underlying securities.

Those of you who are considering PP MLDs should go through this circular.

[adimicra]

Given the change in taxation laws, isn't it better to invest in dynamic allocation funds?
For example, I sold one of my gilt funds and moved to PPFAS dynamic asset allocation fund. The risk profile is closer to gilt funds, plus you get 12.5% long term taxation on capital gains.

One other hypothetical question -
Lets say I have retired and using withdrawals from debt funds as my income.
Lets say I withdrew 20 lakhs in 1 year, and capital gains on this 20 lakhs in 5 lakhs.
Considering debt funds are at slab rate, how much income tax I have to pay?

Please consider that this is my only source of income.

[vaibhav_a_a]

Originally Posted by SmartCat

A debt fund gets capital appreciation because the underlying bonds moves up and down just like a stock. Individual bond in the mutual fund portfolio can either pay interest periodically or at maturity. The proceeds will add to debt MF NAV.

Just like how we cannot predict stock prices/GDP growth/inflation etc, we cannot predict what RBI will do with interest rates either.

To be on the safer side, use a 50/50 mix of overnight/liquid funds and gilt funds (regular, not fixed maturity)

First of all, a massive thanks to you for starting this thread.

Now unfortunately the tax advantage is gone since these posts were made in 2021. Still, there are some other advantages (compounding and deferred tax).

My question is based on the MPC that concluded yesterday - Feb should see a repo rate cut, how much I don't know but there are enough factors to suggest there will be one.

So questions - which type of debt fund should offer a decent return (i.e. something that beats the FD returns over next 3-5 year time frame). There are too many types of debt funds.

thanks for any response

[SmartCat]

Originally Posted by vaibhav_a_a

My question is based on the MPC that concluded yesterday - Feb should see a repo rate cut, how much I don't know but there are enough factors to suggest there will be one. So questions - which type of debt fund should offer a decent return (i.e. something that beats the FD returns over next 3-5 year time frame).

This is a tough question to answer even for seasoned bond professionals. Simply because it has forward looking/predictive aspects. It is equivalent to asking stock market people "which sector will do well". But from what I've read, interest rates are expected to fall world over, as inflation cools off. So longer dated bonds (gilt funds, banking & PSU funds etc) are likely to do well.

So there are 2 ways to approach this:

- Forget interest rates and invest 50/50 in liquid funds & gilt funds (my preferred option)
- Invest in dynamic bond funds

In theory, the dynamic bond fund manager will predict the interest rates and invest in either short dated securities (equivalent to liquid funds) or longer dated securities (equivalent to gilt funds), based on interest rate outlook. Among fund houses, Aditya Birla is the most well known in debt markets. There is this 20 year old Dyanmic bond fund from ABSL: https://www.valueresearchonline.com/...-regular-plan/

Currently, their portfolio is heavily tilted towards gilt funds (see average maturity in years & interest rate sensitivity) - this implies the fund manager expects interest rates to go down: