Hello friends, its been a long time since I've posted anything (worthwhile) on my blog, but recently (last night around 1 am) I had an epiphany about DEBT. I thought I had covered everything in my earlier blog posts, but this epiphany changed everything and has got me thinking......Why do most personal finance related articles only talk about Equities...while Debt is a clear under dog.
To start with....
What is Debt?
Its a sum of money owed or due.
Example: I open a Fixed Deposit worth 1 lac with a bank, the bank becomes a borrower, because it owes me money that I lent it along with some interest.
Please understand, here, I have lent my money to the bank who inturn lends it to some other entity generates profits/reports losses and then (more so in the Indian Context) pays me a measly interest on that sum which is taxed. Thus a bank is here not for social service/ charity but to make profit. More on this later.......
Lets Continue....
What are the (basic) different Debt instruments/products available:
1. Bonds..............Issued by Government. RBI, Public sector companies etc
2. Fixed Deposits....Issued by banks
3. Corporate Fixed deposits.
While a investor may choose to invest in either of the above products individually, a Debt Mutual fund offers a basket which usually consists of all/some or only one kind of the above product.
For example, a typical Debt fund comprises of (see image, click to enlarge) >>>
Thus a Debt Fund largely sticks to the eternal rule of Financial planning "Never put all your eggs in one basket" (even if it is a low risk investment product like debt)
Talking about risk,... In the Indian context of investing, we have preferred Bank Fixed deposits the most without acknowledging the fact that a similar product exists in the investments domain which is tax efficient and generates a healthy real rate of return.
This is all the more important now a days as many reputed banks have reported losses in the recent quarters. Thus a mixed bag of Debt securities instead of a one product portfolio should be very helpful to you as an investor.
What are the returns like?
Now here comes the most important question, especially in India....कितना देती हैं 
?
?
Firstly to measure returns, I have considered a 3 year horizon only, more specifically because of the tax implications
If you look at the 3 yr return, then you might feel that the returns commensurate to that of a bank deposit but what you are not considering here is that unlike a Fixed deposit where your interest would be taxed each year (whether you choose to receive it or accumulate it) in a Debt Mutual Fund it is accounted as a long term capital gain.
Long term capital Gain(LTCG)
Now don't be awed and put off by learning this new term, because its going to help you generate better returns, and best of all, you only have to learn it once.
In Debt mutual fund parlance, any investment that has generated some gains/profits and has completed 36 months i.e 3 yrs is classified as a Long Term capital gain. This LTCG has a tax advantage to it, you can use indexation (adjusting the purchase price of an asset by the inflation rate) and avail of a big concession in terms of payment of tax.
To be continued in part II....
Ninad Kamat
CERTIFIED FINANCIAL PLANNERCM
