I want to invest Rs25 lakh in an ING Liquid Fund and then go for a daily systematic transfer plan (STP) of Rs499 in an ING Domestic Opportunities Fund. Is this the right strategy?
— R. RYNJAH
The strategy is right, but you could have a better selection of funds. In the past three years, ING Domestic Opportunities Fund (Idof) has returned 6.8%, less than its benchmark index, BSE 100, which returned 10.4%. Idof doesn’t have a great long-term track record and in the recently concluded Outlook Money-Morningstar mutual fund (MF) rankings and star ratings, the fund earned just two stars. Instead, pick a fund from the large-cap category under OLM 50, Outlook Money’s recommended 50 schemes. Pick a liquid fund belonging to the same fund house from where you can do a systematic transfer plan.
I had invested Rs20,000 in an HDFC Income Fund on 26 December as interest rates were falling. When should I exit from this fund? You had mentioned July in an article titled ‘Last Chance’.
— AJAY KUMAR
It is tough to predict the exact movement of interest rates in the near future, given the current scenario. During the second half of 2008, central banks around the world aggressively cut interest rates to ease liquidity conditions and make money available to borrowers to kick-start economic activity. On its part, India too cut rates aggressively. This led to bond prices going up, as interest rates and bond prices move in opposite directions.
However, some time later, the state of government finances became clearer and since the government’s revised borrowing plans indicated that it needed to borrow huge chunks of money, bond markets went into a tizzy because such borrowings usually lead to an over-supply of government securities in the bond market. More securities chasing less money leads to a crash in prices.
We suggest you hold on to your bond funds for now and wait for cues from the new government on borrowings and interest rates. Any further news on rate cuts should be seen as an opportunity to book profits from long-term debt funds and switch to shorter-tenure debt funds.
I want to invest in bond and gilt funds. When should I redeem—after one, two or three years—to get maximum benefit? What taxes would be applicable? What do the abbreviations GPRP, GFIP and GSF-LTP stand for?
— R. L. JAIN
Bond and gilt funds both made for good investment options late last year on the back of aggressive interest rate cuts. When interest rates go down, prices of debt securities, and thereby the value of debt funds invested in them, go up. Rate cuts, however, have largely slowed and, coupled with factors such as the government’s finances and borrowing, the future course of interest rate movement remains to be seen.
If volatility in interest rates and negative sentiments in bond markets continue, bond and gilt funds should be avoided. Debt fund redemptions made within a year imply tax rates as per your income-tax slab. Those made after a year would mean 11.33% long-term capital gains tax (including cess and surcharges).
The abbreviations that follow your debt fund’s name indicate the plans and options that the particular scheme offers. So GPRP stands for Gilt Plus-Regular Plan, GFIP for Gilt Fund-Investment Plan and GSF-LTP for Gilt Securities Fund-Long Term Plan.
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