The Hindu Business Line

Go for it if safety is your priority

Investors wary of wild swings in debt fund returns can park money in this fund

- RADHIKA MERWIN

Belying the widespread expectatio­n of a rate cut in its latest monetary policy, the RBI chose to stay pat on rates, causing a kneejerk reaction in the bond markets. The yield on the 10-year GSec spiked by 20 basis points to 6.4 per cent post the monetary policy.

Going ahead, yields can hover in the 6.1-6.4 per cent range, amidst a likely tug of war between global and domestic factors. This leaves little scope for a huge rally in bond prices.

But this does not mean investors should shun debt funds altogether. With deposit rates in a free fall and most banks offering 4 per cent on savings deposit, investors can park some of their money in short-term debt funds that offer better post-tax returns.

Birla Sun Life Savings Fund is a short-term debt fund. Over the past decade or so, the fund has delivered stable returns, making for a good track record. Over three- and five-year periods, the fund has delivered 9.3 per cent and 9.4 per cent return, respective­ly, making it a good alternativ­e to savings deposits.

Risk-averse investors, wary of wild swings in debt fund returns, can park money in this fund.

Impressive results

Birla Sun Life Savings Fund, on an average, has delivered 8.5-9.5 per cent returns annually over the long run — five to 10-year period. For investors looking to invest for a period of less than three years, returns will be taxed at the income tax slab rates. In savings deposits, interest up to ₹10,000 is exempt under Section 80TTA of the Income Tax Act.

But if you hold over ₹2,50,000 in savings accounts, short-term debt funds offer better returns. An 8 per cent return would work out to post-tax returns of 7.2 per cent, 6.4 per cent and 5.5 per cent, respective­ly, for individual­s in the 10, 20 and 30 per cent tax bracket. This is higher than the 4 per cent that most banks offer. Only a handful offer a higher 6 per cent interest.

One has to keep in mind that while returns from short-term funds can vary with market, short-term funds with good track record have delivered returns in the 7-9 per cent over the long run.

Birla Sun Life Savings Fund has delivered an annual return of 7.8 per cent return since inception.

Low risk

Historical­ly, Birla Sun Life Savings has maintained a portfolio of debt securities with high credit rating.

Over the past three years, around 70 per cent of the portfolio has been invested in either government securities, AAA or A1+ rated papers. This lowers the credit risk of the fund.

Modified duration represents the sensitivit­y of a bond’s price to a change in the interest rate. A higher modified duration indicates higher sensitivit­y and vice versa.

The fund’s interest rate risk is also mitigated by its lower duration — under one to 1.3 years. Over the last three years, while the fund maintained an average duration of 0.6 years, it increased it sharply since March this year to a little over one year to take advantage of the fall in yields. The fund has delivered a healthy 9.4 per cent return over the past year.

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