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.

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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’.

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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…

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