Hello Readers!
Have you invested in equity mutual funds? What was your holding period?
When we invest in Equity mutual funds, we all have our investment period or tenure already fix in our minds. The minimum expected holding period does not change with the type of equity fund. Generally, all kind of equity funds have a holding period for long-term, that is mostly 5,7,10 years or more.
But when it comes to debt mutual fund, conditions are not same as in equity mutual funds. Different debt funds serve different goals, so it becomes a bit difficult while choosing the ideal holding period in debt funds for investors. However, two factors can help investors decide their ideal holding period in their debt mutual fund that we are discussing below. Read to know.
Matching Investment Horizon with The Average Maturity of Debt Fund
This is a famous thumb rule for deciding your holding period in your debt fund investment. A Debt fund scheme invest in fixed income securities like debentures and bonds, all these have different maturing periods. The average maturity of a debt fund portfolio refers to the combined maturity profile of the fund portfolio.
For example; suppose a debt portfolio comprises two debt funds A and B, A which is 60% of the fund and matures in 4 years, and B which is the remaining 40%, maturing in 5 years. The average maturity of the fund is 4.4 years (60%X4+40%X5). This way you can calculate the Average maturity of a debt fund portfolio.
The rule says, if the investor wills to invest in debt funds for two years, he must look for Debt funds that have an average maturity of roughly around 2 years.
If investors wish to invest in debt mutual funds for 6 months, then they must look towards investing liquid or ultra-short-term fund with an average maturity of around 6 months.
Choosing debt funds whose average maturity matched your investment tenure, helps to maximize the return potential of your fund. Also, it will keep you calm during the interim changes in the fund’s daily net asset value or NAV.
When Taxation Is the Purpose to Invest in Debt Funds!
Many investor invest in Debt funds as a part of their Debt allocation, that helps to fulfill their short-term needs through steady returns and let their Equity assets grow positively.
Dividend debt funds are taxed before you receive the pay-out. At the highest level this tax is around 29.12% and at a minimum around 26%. While Growth Debt funds attract capital gain taxation. Short term capital gains in a debt fund are taxed at your marginal rate of income tax. Selling after 3 years of holding will attract long term capital gains, which is a lot more efficient at 20% after indexation.
Investors who look towards investing in debt funds as part of their debt allocation should invest in Growth options of Debt funds and hold their debt investment for a minimum of three years.
Last but not the last, the two ideas mentioned above for deciding one’s ideal holding period in their debt fund investment, only gives a basic guide. This is also true that this decision should not be completely based on the above two guides. So, while deciding your holding period in debt funds, do consider other aspects like fund’s credit profile, expense ratio, and fund manager experience other than the two basic factors.
For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).