Vakrangee Q1 FY@3 Result Update

Fixed Income Portion of the Portfolio Should Stabilize the Overall Returns.

Fixed Income Portion of the Portfolio Should Stabilize the Overall Returns.


Mutual funds have gained business over the last few years as a safe form of investment alternative. Mindfulness of the performance and benefits from different equity and hybrid mutual fund schemes witnessed an upsurge over time. As a regulator, SEBI took several measures to simplify the categorization of investments and the AMFI helped to disseminate the idea of mutual funds through an easy to understand advertising campaign. Mutual funds as a legal mechanism can provide debt holders with a tax arbitration, provided that assets kept for three years through mutual funds are eligible as LTCG. Nevertheless, awareness of equity schemes are much more as compared to debt investments due to various uncertainties in the financial market investors obliged to put more attention in fixed income investments.


Taboo of Fixed Deposits:

Equity investment is much more risky than debt instruments and fixed earning investments but it has been observed that people tend to invest in Fixed earning asset class. Most investors are used to investing in fixed bank deposits, in which they are aware of their interest rate or total return on investment.


Volatility in Market:

It is easy to understand. In debt mutual fund investments, investors tend to rely on the yield from the portfolio depending on the past returns, which may not be the correct index for future returns. Although, debt funds invest in securities or bonds that provide mostly fixed coupons or interest payments but securities prices fluctuate to alter the return on investment during the investor’s holding period. The bond price can fluctuate because interest rates or the credit profile of the issuer change in the economy. Bond markets can also often become illiquid, contributing to lower prices for bonds in general. Investors need to be aware that the bond fund will fetch them returns which are close to their Portfolio Rate and which are adjusted to their expenses if things do not change much during their investment horizons. However, the situation completely changes and investors may get higher or lower return than their expectations.


Liquidity concern:

In the past, the world of fixed-income investors has been astounded by a variety of credit events, resulting in large write-downs in the fund values. Though we observed many uncertainties in a financial market over the years, the size of defaults was comparatively low and does not impact much in the investing pattern of the investors and even there was no such significant effect on mutual fund schemes. However, in recent times due to the massive problem of liquidity, investors tends to invest in fixed earning instruments. Investors have expressed a great deal about their disappointment that while the return on portfolio has captured the credit risk of the investment, the return on the portfolio is not at all worthy.

Therefore, when a scheme faced major redemptions, the scheme avoided accepting new subscriptions or redemptions which would lead the customer’s investment being illiquid. Based on this experience, investors are likely to reject credit risk or high yield funds which are unfortunate because any developed market requires a market where liquidity is stable and investors can evaluate and then take part in high yield trades. This dimension needs to be closely examined by the regulator, as failure to fix problems at ground level will lead to a fragmented market with less issuers locking up all liquidity.

Investments with fixed revenue will produce strong returns at least on a periodic basis. If the economy slows and inflation is not at its height, a central banker will try to lower interest rates, increase the money in the system, and encourage banks to loan to the real economy by lowering alternative deployment rates.
In these situation, value bonds have been observed at peak and investors get the capital gains added to their portfolio return. So if equity funds do not perform well, fixed-income funds are a perfect sanctuary for any portfolio. On the contrary, if rates increase instead of decreasing due to a decreased rating or an unregulated fiscal expansion, portfolios with a fixed income may produce returns lower than portfolio produce. Nevertheless, capital is not in danger of being frozen out forever because there is no chance of illiquidity.



A good investment consultant, with some common sense and some history should be able to recognize the various risks linked with debt fund schemes and properly evaluate the client’s risk profile and identify schemes of better-managed funds and avoid obvious mistakes. Although, a fixed-income portfolio contains many moving parts. A competent adviser is usually able to separate all the advantages and disadvantages. The portfolio’s fixed income portion should add stability to the overall returns and not to results in anxiety and concern.



The History of the Modern Portfolio

Loan against FD.

Loan against FD.


All Non-Banking Financial Company (NBFC’s) and Housing Finance Companies (HFCs) accepting FD’s now offer loans on FD’s under certain terms and conditions. Any individual who has invested in FDs may claim loans against deposits by paying two percent above the FD rate for the loan period, and this can be executed after three months of deposit. The loan against the FD option can be considered over the option of prematurity of fixed deposits.


Pre-mature withdrawal theory of FD:

Given the current economic situation where government initiates to bring liquidity into the system, HFC and NBFCs have also re-established their liquidity characteristics in their FD schemes. Organizations offer FD options with premature withdrawal. However, no partial withdrawal option will be offered to the clients. In the event of premature withdrawal, the entire FD will be canceled and the interest on penalties for the period FD will be charged. Let’s suppose, for 5 years from 2017 to 2022, an individual has ₹10 lakh in FD. If he wants to close the FD prematurely in 2020, he must give up 1% to 2% annually in penalty charges for 3 years. You probably only need 50% of the money, but you have to withdraw the entire funds.


Brief about availing Loan against the FD’s:

In case of financial crises such as medical bills or marriage payments, people prefer to search for loans from multiple outlets to fulfill their requirements. One such source is a fixed deposit loan. The loan against an FD is a secured loan where your fixed deposit funds can act as a collateral to receive a loan. You will obtain a loan balance of up to 90% of the deposit. You don’t have to pause and take the money from FD for loan whereas you will receive a loan against FD.


Who can apply for this scheme?

Anyone with a deposit account can use FD loan irrespective of salary, occupation and credit rating. The following individuals may apply for an FD loan –

• All the fixed deposit holders may apply for a loan from FD, including individual holders or joint accounts.
• If you are minor, then this scheme is not applicable for you.
• Five-year tax saving FD investors can not apply for this type of loan.


Pros from this scheme:

The FD loan does not have any obligation and it is impartial of any occupation and can be used by employees or self-employed persons. To get this loan, you don’t need a good credit score. The sum credited to your account can be issued within hours of application.

• FD loans have a lower rate of interest than other unsecured loans, such as personal loans.
• There is no fee for processing to avail this scheme. Most banks don’t charge any kind of processing fee for this scheme. If the banks charge any fee, the processing fee will be negligible as compared to the processing fee for other loans.
• You may not have to interrupt the FDs and chose to withdraw prematurely. In turn, this saves you from losing interest in fixed deposit.
• Loan for both domestic and NRI Fixed deposits are available.
• To avail this scheme, the process is very simple and hassle-free. The process of this scheme is easy and straightforward with least documentation. The form is handled quickly and there is no much involvement of paperwork.
• The loan may be paid in installments or for a lump sum, but it must be paid up to the expiry of your FD term.
• The main benefit of the FD loan is that the financial company does not check the credit score and the past records. Your FD account acts as a security so that banks recover money from the FD account if individual default due to any uncertainties.


Cons from this scheme:

• If an individual is unable to pay the amount loan borrowed, the bank is entitled to recover the funds from a fixed deposit in order to recover the borrowed money.
• The holding of the loan against the FD will not exceed the maturity period of the fixed deposit. This means in any circumstances the borrower needs to pay back the loan before the maturity of FD.
• If you do not have a fixed deposit and you require immediate money, a personal loan can be considered as better, cheaper and viable option.


The loan limit of various banks for Loan against Fixed deposits:

The SBI Bank, Bank of Baroda, ICICI Bank, Citibank, Punjab National Bank sanctions loan up to 90% of the total funds available in fixed deposits. Bank of Baroda and Axis Bank sanctions loan up to 95% and 85% respectively of the total funds available in fixed deposits.


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