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Tuesday, January 28, 2014

Risks in Bank deposits and Debt Mutual Funds:

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Call 0 94 8300 8300 (India)

 

 

I have heard many insurance agents who pitches endowment plan to their clients saying that there investment will be devoid of risk. Even ULIP sellers convince there client by giving this statement and allocate there premium towards more of debt. Even you must be wondering that how come a bank deposits be risky. But one need to understand that risks does not mean the probability of losing capital only, it also includes the opportunity loss, value (purchasing Power) erosion etc. Some of the risks which these fixed income bearing instrument carries are as under:

1. Credit Risk: Credit risk is defined as the risk of not receiving the payment of coupon or principal as per the agreed schedule. Credit risk can arise out of lack of ability or willingness. Lack of ability can be assessed through credit rating of the instrument, whereas lack of willingness is a subjective matter and is difficult to measure.This risk is very less in bank deposits and Zero in Government securities (at least theoretically).

2. Interest rate Risk: This is the risk that the interest rates may go up pushing the bond prices (debt fund NAVs) down. Interest rates and bond prices (debt fund NAVs) share an inverse relationship. Thus in rising interest rate scenario where the debt funds NAV gets affected negatively, there it is an opportunity loss for Bank Fixed deposits and Fixed maturity plan investors. This is in the sense that had they waited for some more time they could have invested on better rates. Longer the duration higher the risk.

3. Reinvestment Risk: Reinvestment risk arises when the coupons are received and the interest rates in the market have reduced. In such a scenario, the coupons get invested at lower interest rates than what the bond earns. The investor could have been better off going for a cumulative option, if it was available. In the falling interest rate scenario this risk is high in Short term funds and short term bank deposits.

4. Liquidity Risk: This risk arises where fund managers invested in the bonds which are illiquid in nature and the investor may not get the money if needed before maturity. Managers of open-end mutual funds have to always keep this risk in mind.

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Invest in Tax Saving Mutual Funds ( ELSS Mutual Funds ) to upto Rs 1 lakh and Save tax under Section 80C.

Invest Tax Saving Mutual Funds Online

Tax Saving Mutual Funds Online

These links can be used to Purchase Mutual Funds Online that are regular also (Investment, non-tax saving)

Download Tax Saving Mutual Fund Application Forms from all AMCs

Download Tax Saving Mutual Fund Applications

These Application Forms can be used for buying regular mutual funds also

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