1. For a retail Debt fund investor, his selection should be in line with:-
a) Duration of his investment horizon needs and
b) Risk he is prepared to take for better returns.
2. For Duration-selection, Sebi's rationalized Duration-wise categorization helps:-
a) Overnight - 1 day
b) Liquid - >1 to <91 days
c) Ultra Short Duration - >3 to 6 months
d) Low Duration - >6 to 12 months
e) Short Duration - >1 to 3 years
f) Medium Duration - >3 to 4 years
g) Medium to Long Duration - >4 to 7 years
h) Long Duration - > 7 years
3. For Risk-selection, he should take into account:-
a) Interest rate risk - when trading them in secondary market.
b) Liquidity risk - when market transactions get hampered.
c) Reinvestment risk - when returns reduce on reinvesting.
d) Inflation risk - when value of returns reduces with time.
e) Credit/default risk - upon delays in getting returns / principal.
f) Downgrade risk - by credit rating agencies for various reasons.
4. When interest rates are reducing, a Debt fund's comparison with a bank's Fixed Deposit becomes inevitable for a retail investor to take a slection call, for which he should keep in mind:-
a) Bank FDs, score over Debt funds in capital protection.
b) Interest earned in FDs is taxed at slab rate (senior citizens are allowed deduction under Sec 80TTB within overall 50,000 limit).
c) Capital gains in Debt funds are taxable at slab rate below 3 years, and at 20% after inflation indexation benefits above 3 years.
d) 5-yr+ tax-saver FDs are eligible for Sec 80C benefits within overall 1.5 lakh limit.
e) Flexible FDs are more suitable to park a contingency fund of 6 months expenses (incl. loan EMIs),
f) Liquid funds, without any exit load, are more suitable for an emergency fund needing high liquidity, for investing near-term working capital with inflation-efficient returns, and for organizing STPs to invest in equity funds.
5. A 5-yr+ Long-term Debt fund can score over a 5-yr+ FD as:-
a) The longer a Debt fund's duration, the bigger is the indexation benefit, thus attracting a lower tax rate, except when an investor is in the lowest tax bracket.
b) There is also no TDS in Debt funds, so no need to submit Form 15H or 15G like in FDs.
c) Taxation in a Debt fund is deferred indefinitely till the investor redeems his units, while the income from FDs is taxed on an annual basis even if it matures 5+ years later.
d) Capital gains from a Debt fund can be set off against Short-term and Long-term capital losses in other investments.
e) Debt funds are also more liquid, as you can withdraw your investments at any time, and can also make partial withdrawals, without having to break the entire investment.
f) In an open-ended Long-term Debt fund, there are no hassles of maturity, reinvestment and prevailing interest rates, and you don't lose even a day's growth potential.
g) You can even invest small amounts through SIPs or even a lumpsum, besides availing SWPs to withdraw a pre-determined sum for your monthly needs.
h) You can also seamlessly shift money from a Debt fund to an Equity fund of the same fund house through STPs, and there is no penalty if it stops due to insufficient money in your Debt fund.
a) Duration of his investment horizon needs and
b) Risk he is prepared to take for better returns.
2. For Duration-selection, Sebi's rationalized Duration-wise categorization helps:-
a) Overnight - 1 day
b) Liquid - >1 to <91 days
c) Ultra Short Duration - >3 to 6 months
d) Low Duration - >6 to 12 months
e) Short Duration - >1 to 3 years
f) Medium Duration - >3 to 4 years
g) Medium to Long Duration - >4 to 7 years
h) Long Duration - > 7 years
3. For Risk-selection, he should take into account:-
a) Interest rate risk - when trading them in secondary market.
b) Liquidity risk - when market transactions get hampered.
c) Reinvestment risk - when returns reduce on reinvesting.
d) Inflation risk - when value of returns reduces with time.
e) Credit/default risk - upon delays in getting returns / principal.
f) Downgrade risk - by credit rating agencies for various reasons.
4. When interest rates are reducing, a Debt fund's comparison with a bank's Fixed Deposit becomes inevitable for a retail investor to take a slection call, for which he should keep in mind:-
a) Bank FDs, score over Debt funds in capital protection.
b) Interest earned in FDs is taxed at slab rate (senior citizens are allowed deduction under Sec 80TTB within overall 50,000 limit).
c) Capital gains in Debt funds are taxable at slab rate below 3 years, and at 20% after inflation indexation benefits above 3 years.
d) 5-yr+ tax-saver FDs are eligible for Sec 80C benefits within overall 1.5 lakh limit.
e) Flexible FDs are more suitable to park a contingency fund of 6 months expenses (incl. loan EMIs),
f) Liquid funds, without any exit load, are more suitable for an emergency fund needing high liquidity, for investing near-term working capital with inflation-efficient returns, and for organizing STPs to invest in equity funds.
5. A 5-yr+ Long-term Debt fund can score over a 5-yr+ FD as:-
a) The longer a Debt fund's duration, the bigger is the indexation benefit, thus attracting a lower tax rate, except when an investor is in the lowest tax bracket.
b) There is also no TDS in Debt funds, so no need to submit Form 15H or 15G like in FDs.
c) Taxation in a Debt fund is deferred indefinitely till the investor redeems his units, while the income from FDs is taxed on an annual basis even if it matures 5+ years later.
d) Capital gains from a Debt fund can be set off against Short-term and Long-term capital losses in other investments.
e) Debt funds are also more liquid, as you can withdraw your investments at any time, and can also make partial withdrawals, without having to break the entire investment.
f) In an open-ended Long-term Debt fund, there are no hassles of maturity, reinvestment and prevailing interest rates, and you don't lose even a day's growth potential.
g) You can even invest small amounts through SIPs or even a lumpsum, besides availing SWPs to withdraw a pre-determined sum for your monthly needs.
h) You can also seamlessly shift money from a Debt fund to an Equity fund of the same fund house through STPs, and there is no penalty if it stops due to insufficient money in your Debt fund.