[concorde24]

Hi All,

Debt funds are in red for the last few days, looks like the recommendation is to hold the money in liquid/overnight funds till the rates go up. But those who are in Asset allocated long term holdings need not worry.

Article from ET - Debt funds in red after budget. What should mutual fund investors do?
https://economictimes.indiatimes.com...w/89296118.cms

[RJK]

Originally Posted by SmartCat

50% to (debt funds + FD + PPF) and 50% to (stocks + equity funds) is a simple long term allocation. Within debt funds, allocate 1/3rd each towards overnight or liquid funds (short duration), Banking & PSU funds (medium duration) and Gilt funds (long term).

List of each category of funds:
https://www.valueresearchonline.com/...uspended-plans
https://www.valueresearchonline.com/...uspended-plans
https://www.valueresearchonline.com/...uspended-plans

Choose funds with long history, 3 to 5 star rated, funds with large assets and fund houses with good reputation (avoid lesser known names)

Thanks Smartcat. One question regarding the Gilt funds - I’m looking at long term holding > 8 yrs for my father who’s in 70s now. Clearly the advantage is lower tax liability. However, do you think now would be right time to invest or would be prudent to wait? Also, I’ve got a decent chunk of money to invest in Gilt, so an aggressive SIP or lump sum investment?

Thanks!

[SmartCat]

Originally Posted by RJK

However, do you think now would be right time to invest or would be prudent to wait? Also, I’ve got a decent chunk of money to invest in Gilt, so an aggressive SIP or lump sum investment?

Can't say for sure if this is the right time. There are inflation/rate hike worries all over the world.

Since your holding period is >8 years, you have a large lumpsum amount to invest and worried about timing, then perhaps you can invest in RBI floating rate bond. There is a lock-in period of 7 years. It is currently offering 7% pa (but subject to change over the next 7 years) and interest is paid out half-yearly.
https://www.icicidirect.com/fd-and-bonds/rbi-bonds



All major banks offer RBI floating rate bonds for investment. If you have a SBI account, just google "RBI floating rate bond SBI"

Another option for your dad is LIC PMVVY pension scheme that offers 7.4%pa returns currently, with a 10 year lock-in. Offers monthly payouts. There is no insurance component here, and is a pure investment scheme.
https://licindia.in/getattachment/Pr...glish.pdf.aspx

Investment can be done online. But the biggest problem is that LIC website is extremely clunky and buggy. But it finally went through for my dad after a couple of attempts.

Edit: Not a good idea to approach LIC agents. Since there is no insurance component, their commissions are probably low on this scheme. So they might try to push an alternative scheme. Best to invest online without an agent.

[inder]

Hi Smartcat , have been following your comments and suggestions. I too was eyeing PMVVY for my mom. But did not find 7.4% mentioned anywhere.

[SmartCat]

Originally Posted by inder

Hi Smartcat , have been following your comments and suggestions. I too was eyeing PMVVY for my mom. But did not find 7.4% mentioned anywhere.

https://licindia.in/Products/Pension...andana-Yojana1



The wording is a bit confusing, but it does say 7.4% for all policies purchased before March 31st 2022.

[inder]

I reverse calculated from an LIC agents app. The interest infact comes to around 7.66
I had taken 15lacs and getting an interest of 114900 per annum. and comes to 7.4% if pension is taken monthly.

[ValarMorghulis]

Originally Posted by SmartCat

... in RBI floating rate bond. There is a lock-in period of 7 years. It is currently offering 7% pa (but subject to change over the next 7 years) and interest is paid out half-yearly....

Are these the same as RBI Savings bonds, which are tax free?

Are there any other tax free instruments like PPF?

[Saanil]

Originally Posted by ValarMorghulis

Are these the same as RBI Savings bonds, which are tax free?

Are there any other tax free instruments like PPF?

The RBI Savings Bonds are not tax free as far as I know. I think prior to 2020, the rate on RBI Savings bonds was fixed at 7.75%. But in 2020, they revised the structure of these savings bonds from fixed rate to floating rate.

The rate on these bonds is determined by adding 0.35% to the National Savings Certificate (NSC) rate. If the NSC rate is 6.00%, the rate on RBI bonds would be 6.35%. If I remember correctly, the gov't revises the NSC rate every quarter.

[adimicra]

Is this a good time to put money into GILT funds, considering the spike in yields

[SmartCat]

Originally Posted by adimicra

Is this a good time to put money into GILT funds, considering the spike in yields

Yeah, big drop in NAV values this week so far. However, rather than predict direction of rates, it is best to invest based on current 'Yield to Maturity' for a gilt fund. If the yield is satisfactory, go for it.

[graaja]

Experts: I have a doubt. How does the NAV of bond funds move? Is it just on the value of the bonds? Or a combination of the value of the bonds in the secondary market and the interest accumulation?

[SmartCat]

Originally Posted by graaja

Experts: I have a doubt. How does the NAV of bond funds move? Is it just on the value of the bonds? Or a combination of the value of the bonds in the secondary market and the interest accumulation?

There is a complex formula that calculates the current fair value of a bond, based on interest payout and time to maturity. A bond can trade at a premium to fair value or discount to fair value based on circumstances like demand/supply, default risk, liquidity, flight to safety and so on.

Eg: Let's say there is major global crisis brewing and investors expect worse to come. Then investors will sell Indiabulls Housing Finance bond and buy HDFC bond, ignoring the yield or value. HDFC bond will become overvalued and IBULHSG Fin bond will become undervalued.

As a retail investor, we could just look at its yield to maturity & compare it with coupon rate. Eg: If a bond has a yield to maturity of 10% but has a coupon rate of 8%, it means the bond is undervalued. And vice versa.

[carboy]

Originally Posted by SmartCat

There is a complex formula that calculates the current fair value of a bond, based on interest payout and time to maturity.

It's actually not that complex.

Let's take one bond.You write down the interest payout each year till maturity including maturity principal repayment. Then you calculate present value of each year's payouts - for this you use the current interest as the discounting rate (not the interest of the bond itself but the current interest rate in the market which may have changed because of interest rate changes).

Then you add up all the present values of each year. Voila - you have the current tradable market value of that one bond. You do this for all bonds in a debt fund - you get the NAV of the debt fund.

Originally Posted by graaja

Experts: I have a doubt. How does the NAV of bond funds move? Is it just on the value of the bonds? Or a combination of the value of the bonds in the secondary market and the interest accumulation?

Take a bond of face value Rs. 100. Let's say the interest rate is 5%. Each year it pays the holder Rs. 5 & then at the end of 5 years, it pays 105 (final years interest plus + principal).

There are 2 ways the market value of the bond changes

1) The company's financial position has changed - if it's become weaker, then the bond may trade for lower than Rs. 100.

2) The market interest rate has change. RBI increased prime rate by 100 basis points (1%). So now a new bond of similar quality pays 6%. So now this bond's value automatically changes - why will someone buy it for Rs. 100 when you can buy a newer bond for Rs. 100 which gives 6%. So this bond's value goes down. How to calculate the new value - I have mentioned that above in this same reply. In the secondary market, the market will now trade with this value - because all the players know how to calculate it. Nobody will pay more or sell for less assuming the financial condition of the company hasn't changed.
You add up all the bond values in a fund & divide by number of units to get the NAV of the fund.

[graaja]

Originally Posted by SmartCat

As a retail investor, we could just look at its yield to maturity & compare it with coupon rate. Eg: If a bond has a yield to maturity of 10% but has a coupon rate of 8%, it means the bond is undervalued. And vice versa.

Thank you for the explanation.

With stocks, we aim to buy undervalued stocks. Does the same apply with bonds as well? For an example, below are two bonds.

Fullerton India
Face value: 10,00,000
Current value: 10,80,100
Yield to maturity: 7.6%
Coupon: 9.3%
Time to maturity: 6 years 2 months

Indiagrid Trust
Face value: 10,00,000
Current value: 9,99,000
Yield to maturity: 7.53%
Coupon: 7.32%
Time to maturity: 9 years 2 months

The first one is overvalued and the 2nd is undervalued. Were I to invest in one of these which one would be the logical choice?

[anandhsub]

Originally Posted by graaja

Experts: I have a doubt. How does the NAV of bond funds move? Is it just on the value of the bonds? Or a combination of the value of the bonds in the secondary market and the interest accumulation?

Value of bonds and the interest accumulation assuming you mean growth funds and not dividend funds.

In technical terms the interest accumulation is called the "carry" of the bond.

If a 10yr bond is yielding say 7% and has a modified duration of 7yrs..

then over the course of the year if the yield on the bond has gone up to 8% that would mean a loss in the price of 1*7 = 7%.

But since the bond yields 7% an year you would have gained the carry and hence at the end of the year the NAV would approx remain the same.

There is one more concept of "roll" ( which is the price and duration change that happens when a 10yr bond becomes a 9 yr bond after 1 year) but thats a bit more complex to work out.