Long Term Debt Funds- When Should You Invest?

Updated on January 23, 2020 , 107 views

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 2020.

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Long Term Debt Funds- A Plan for Long Term Investment

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.

Returns and Risk

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.

Long Term Debt Funds Taxation

Tax implication on debt funds is computed in the following manner-

Short Term Capital Gains

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.

Long Term Capital Gains

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

How to Invest in Long Term Bond Funds?

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.

Best Long Term Bond Funds to Invest in 2020

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	₹22.4374 ↑ 0.01	₹12,320	5,000	500	1.9	3.9	10.4	7.6	10.3	6.95%	3Y 1M 17D	4Y 2M 19D
Aditya Birla Sun Life Corporate Bond Fund Growth	₹77.0681 ↑ 0.05	₹17,587	1,000	100	1.9	4	9.7	7.6	9.6	6.68%	1Y 7M 2D	1Y 11M 23D
SBI Magnum Gilt Fund Growth	₹45.3496 ↑ 0.04	₹1,945	5,000	500	1.9	2.6	14.1	7.2	13.1	5.87%	3Y 9M 29D	5Y 11M 19D
Nippon India Gilt Securities Fund Growth	₹27.4105 ↑ 0.04	₹1,118	5,000	100	1.5	2.6	13.1	7.6	12.4	6.86%	6Y 8M 23D	10Y 14D
UTI Gilt Fund Growth	₹44.8629 ↑ 0.03	₹531	5,000	500	0.9	1.5	12.5	6.9	11.8	6.35%	3Y 8M 26D	5Y 4M 17D
Aditya Birla Sun Life Government Securities Fund Growth	₹57.1358 ↑ 0.06	₹231	1,000	1,000	1.3	1.7	11.8	7.2	11	6.87%	5Y 10M 6D	8Y 3M 18D
ICICI Prudential Gilt Fund Growth	₹69.5169 ↑ 0.10	₹1,417	5,000	1,000	2.2	2.7	11.2	6.3	10.8	6.73%	5Y 3M	8Y 8M 5D
Canara Robeco Gilt Fund Growth	₹54.9869 ↑ 0.05	₹66	5,000	1,000	1	1.5	10.8	5.7	9.9	6.29%	3Y 7M 24D	5Y 4M 20D
ICICI Prudential Corporate Bond Fund Growth	₹20.5645 ↑ 0.01	₹11,339	5,000	1,000	2.1	4.4	9.9	7.4	9.9	6.96%	1Y 9M	2Y 4M 24D
Kotak Corporate Bond Fund Standard Growth	₹2,658.55 ↑ 1.58	₹4,418	5,000	1,000	1.9	4.5	9.6	7.9	9.6	6.82%	1Y 6M	1Y 8M 19D
Note: Returns up to 1 year are on absolute basis & more than 1 year are on CAGR basis. as on 24 Jan 20

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Disclaimer:
All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.