Long term debt funds are a type of Debt Mutual Funds that invest in corporate Bonds and government securities (g-secs) that have a long-term maturity period. The average maturity of these funds is in excess of 3 years, most of the times. That is why, these funds are suitable for investors who wish to make a mid to long term Investment plan i.e., typically for 3-5 years or even more. Let's understand how long term debt funds works and what are the best long term bonds funds to invest in 2019.
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Long term debt funds invest their major underlying asset in debt instruments like corporate debentures, bonds and money market instruments & government securities with a higher maturity period. Investors should invest in long term debt funds if they have an investment time frame of more than 3 years. Also, this fund is only suitable for investors who are willing to take some level of risk in the investment.
Long term debt funds are sensitive to changes in the interest rate and are more volatile than other categories of debt funds. Interest rates and prices of the debt instruments have an inverse relationship, which means that they move in opposite directions. For instance, a falling interest rate is good for debt funds or bond funds. Long term income funds usually benefit when the interest rates are moving downwards. Moreover, during interest rate falls, the bond prices go up and this boost NAVs of the Debt fund schemes.
In a falling interest rate scenario, the average maturities of such bonds can go up to around 7-10 years. When the interest rates rise, they stock up lower tenured securities and keep the portfolio’s average maturity low.
Mostly, it is advisable to invest in long term bond funds when the interest rates are expected to ease down because a decrease in the interest rates causes a rise in the prices of long-term securities. Investors who are comfortable with fluctuating interest rates in the market, should only prefer Investing in long term debt funds.
These funds are meant to give returns in excess of bank fixed deposits. Furthermore, if held for more than three years, the returns are more tax efficient. But, on the risk side, these funds can get volatile when the interest rates suddenly change direction. In a sustained rising interest rate regime, these funds give modest returns as they cannot sell long-dated bonds and switch to shorter tenured scripts.
Tax implication on debt funds is computed in the following manner-
If the holding period of a debt investment is less than 36 months, then it is classified as a short-term investment and these are taxed as per individual's tax slab.
If the holding period of debt investment is more than 36 months, then it is classified as a long-term investment and is taxed at 20% with an indexation benefit.
|Capital Gains||Investment Holding Gains||Taxation|
|Short Term Capital Gains||Less than 36 months||As per individual's tax slab|
|Long Term Capital Gains||More than 36 months||20% with indexation benefits|
Investors can invest in two ways— SIP or Lump sum. For average investors, SIP (Systematic Investment Plan) is the most viable option. It gives you a systematic option of investing monthly/quarterly/annually basis. In a lump sum, investors have to invest a considerable amount as a one-time down payment in the scheme. The minimum investment amount for a lump sum is INR 5000, whereas for a SIP it is INR 500.
Fund NAV Net Assets (Cr) Min Investment Min SIP Investment 3 MO (%) 6 MO (%) 1 YR (%) 3 YR (%) 2018 (%) Debt Yield (YTM) Mod. Duration Eff. Maturity HDFC Corporate Bond Fund Growth ₹21.5519
₹12,684 5,000 500 3.6 6.3 10.8 8.3 6.5 8.26% 2Y 5M 26D 3Y 5M 5D Aditya Birla Sun Life Corporate Bond Fund Growth ₹73.8908
₹15,320 1,000 100 3 5.4 10.1 8.1 7 8.4% 1Y 7M 20D 2Y 2M 8D Reliance Gilt Securities Fund Growth ₹26.7054
₹962 5,000 100 8 10 16.6 10.2 8 7.82% 6Y 11D 9Y 4D Aditya Birla Sun Life Government Securities Fund Growth ₹56.0099
₹183 1,000 1,000 8 9.6 15.6 9.8 6.9 7.06% 3Y 6M 7D 5Y 3M 7D SBI Magnum Gilt Fund Growth ₹44.1154
₹1,400 5,000 500 8.7 10.8 15.5 9.8 5.1 7.65% 4Y 11M 26D 7Y 6M 18D UTI Gilt Fund Growth ₹44.0772
₹475 5,000 500 8.1 10.5 15 10.3 6.3 7.4% 3Y 7M 28D 5Y 4M 30D Canara Robeco Gilt Fund Growth ₹54.1891
₹67 5,000 1,000 7.7 9.1 13.3 9 4.9 7.64% 6Y 7M 10D 9Y 8M 23D ICICI Prudential Gilt Fund Growth ₹67.4635
₹1,028 5,000 1,000 6.2 8 12.5 8.7 6.8 7.47% 2Y 10M 17D 4Y 9M 18D ICICI Prudential Corporate Bond Fund Growth ₹19.6463
₹6,599 5,000 1,000 2.8 5.3 9.3 7.7 6.4 8.28% 1Y 7M 6D 2Y 3M 25D Kotak Corporate Bond Fund Standard Growth ₹2,537.06
₹1,637 5,000 1,000 2.5 4.9 9.2 8.1 7.5 8.18% 11M 1D 1Y 14D Note: Returns up to 1 year are on absolute basis & more than 1 year are on CAGR basis. as on 12 Jul 19
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