In investing, it is a
known fact that ‘Higher the risk levels, better are the chances of getting
higher returns’ but it comes with a disclaimer - Returns are not guaranteed! This thought process is normally used
by an investor that has a higher risk-appetite since the investment of his
hard-earned savings could also yield negative returns. The rate of interest on
a majority of the FD’s is around 7.0% (before tax for non-senior citizens) and
around 5.5% (after tax) which could result in returns much below inflation.
Banks have been widely
hit by the gross Non-Performing Assets (NPA’s) amounting to a humongous Rs. 8.41
Lakh crore in December 2017, led by industry loans followed by services and
agriculture sectors (Source). NPA’s have a huge amount of negative impact on a bank’s
balance sheet and profitability.
The scenario is so bad that banks were asked to
set up Asset Reconstruction Company for faster NPA resolution by Finance
Minister Piyush Goyal (Source).
Long
Term Debt Mutual Funds: Features, Risks and Customer Segment
Below are some options
that investors have for long-term investing
As long as long-term
investing is concerned, many investors prefer to invest in long term debt mutual funds. However, in order to gain significant
gains from the funds, the fund should be chosen and utilized carefully. Many
investors invest in these funds for a shorter duration and expect very good
returns. Basically, they want to capitalize on profits generated from the
favorable interest rate movements but their yield would be impacted when the interest
rates move in the opposite direction.
The return from an
investment in debt mutual fund depends on the following*:
·
Average Maturity - A debt fund
portfolio comprises several bonds with varying maturity dates.
·
Modified Duration - The duration is the
measure of price sensitivity of the portfolio to change in interest rates. For
instance, if interest rates go down (or up) by 1% in a month, the NAV of the
fund will go up (or down) by 4% if modified duration is four years.
As mentioned earlier,
the Debt Mutual Funds have inherent risks - Interest rate fluctuations, Credit
risk (where the credit profile of the fund is very important) and Liquidity risk (fund manager unable to
sell a particular security due to lack of demands). Based on these factors and
depending on the investment portfolio of the investor, there was pressing need
for a fund that could target the High-Net Worth Individuals (HNI),
Parents/Grandparents and Retirees since customers in these three segments aim
to grow their wealth for themselves or for securing the future of their legacy.
Though there are a
couple of Debt Products, not many provide the opportunity to capture current
interest rate for the long term and address the requirements of investors in
the HNI segment customers who want to preserve their wealth by locking in
current interest rates. This is the gap that Reliance
Mutual Fund, a reputed finance
player is planning to fill with it’s soon to launch product – Reliance Nivesh Lakshya Fund.
Reliance
Nivesh Lakshya Fund: Fund Overview, Investment Methodology and more
Reliance Nivesh Lakshya
Fund is an open-ended debt scheme that would primarily invest in long-date
government securities. The Fund Offer is
open for investing currently and the NFO closes on 2nd July, 2018.
As countries go
through rapid development, and grow on to become Developed Economies from being
Emerging Economies, their levels of inflation and interest rates tend to come
down.
A look at how wealth
is eroded due to falling interest rates
A product like Nivesh
Lakshya Fund will be applicable for indexation benefit since indexation
benefits are applicable only to investments in debt mutual fund schemes.
Salient features of Nivesh Lakshya Fund
·
Investors would secure
prevailing considerably higher interest rate [close to 8% plus] for the next
25-30 years.
·
Investments would be
predominantly done in long-dated ‘Government Securities (G-Secs)’ so that
consistent performance yields better returns for the investors.
·
GILTs would be held
till their maturity (unless there is a redemption request).
·
Though it is meant to
be a long-term investment, the best part about Nivesh Lakshya is that there is
no lock-in period.
·
As the fund is
targeted to a wide range of customers (HNI’s, Senior Citizens, Retirees, etc.),
there is an opportunity for them where they can create multiply their wealth
for the next generation.
Over and above
mentioned features, the core USP of the product is that there is certainty of
returns, if investments are held till maturity of the underlying paper. There
is no other investment option that guarantees such kind of risk-free returns
(if invested for a longer period of time).
Below are some of the
compelling points on ‘Why you should in
Nivesh Lakshya’ and ‘What is the
overall fund strategy’.
Return
Criteria and why should HNIs invest in Nivesh Lakshya
In terms of returns,
every six months, the fund would earn all interest payments from the
government, for the maximum investment duration of 28 years. Even though there is no lock-in period, it is advisable that
the investment is held till maturity since the performance of Nivesh Lakshya
does not vary according to changes in the interest rate movements.
Though HNIs hold some
portion of their wealth in fixed-income instruments, the options available to them are becoming less and less
attractive and this is why investment in Reliance Lakshya Fund would be an
ideal fit since they have the appetite to keep the funds locked in for a longer
duration of time!
For more information
about the fund, please visit Lakshya Nivesh on Reliance Mutual
Fund website. What are your early
thoughts about the product, do leave your feedback in the comments section…
Reference links*
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