How and why are low duration funds essential for your portfolio?

2017 witnessed a major event in the Indian mutual funds space. SEBI launched a re-categorization and rationalization exercise to ensure that mutual funds remain “true” to their label and schemes within the same category share uniform characteristics. For investors, this re-classification of debt funds, equity funds and hybrid funds would translate into simplicity and standardization. This in turn would enable them to pick the correct funds for themselves. 

This re-classification exercise had three major type of changes – a mere change in the name of funds, funds which have now moved into another category (resulting in a change in investment style) and funds which have merged with some other fund. 

As per the revised classification of debt funds, there are 16 types of schemes in this category. Broadly, there are two ways to look at this classification of debt funds – basis their duration or strategy. Duration wise they can be classified into overnight, liquid, low duration, short duration, ultra-short duration, medium, medium to long and long duration. In this article, we will talk about low duration funds and why they are essential for your portfolio.

Low Duration Fund Meaning

Low duration funds invest in debt and money market securities in such a way that the fund’s Macaulay duration is between six months to a year. The maturity period of these funds lies somewhere in between the new classification of debt funds. They have a higher maturity duration than overnight, liquid and ultra-short duration funds but shorter than short, medium, medium to long and long duration funds.

As per a report published by BloombergQuint, the AUM of low duration funds grew by 8% in the year 2019.

Why it is a good idea to invest in low duration funds? 

  1. Risk

Debt funds are known as the relatively less risky investment route. However, within debt funds too, the level of risk varies basis the maturity period. Risk and maturity period are directly related. Longer is the maturity period, higher is the risk (due to higher probability of interest rate fluctuations).

As a result, low duration funds are considered as a safer option amongst debt funds. Investors with a lower risk tolerance can easily invest in these funds. 

  1. Return

Low duration funds score not only on the risk parameter, but also returns. Compared to other (relatively less risky) investment options such as savings account, etc. these funds have the potential to generate higher returns.

  1. Supplementary income

These funds can be used as a way to generate a steady stream of income (mix of interest and capital gains). A SWP (Systematic Withdrawal Plan) can help you to fund your financial goals in the 6 to 12 months’ time frame.

Things to keep in mind while investing in low duration funds

  1. Investment Tenure
    Low duration funds can give you the optimum results provided your investment tenure does not exceed one year. It is important to align your investment horizon with the maturity period of the chosen debt fund
  2. Expense Ratio
    Considering that your investment is for a relatively short time frame, the expense ratio can play a crucial role in your net gains. A lower expense ratio will help in maximizing your returns. However, this should not be the only selection criterion. It needs to be assessed along with other quantitative (performance track-record, consistency, etc.) and qualitative (fund house reputation, track record of fund manager, etc.) factors.
  3. Risk
    Always remember that no investment avenue (even FDs) are devoid of risk. A low-duration fund definitely carries lesser risk. However, the word to be noted is “lesser”. Even these investments have three risk components – credit risk, liquidity risk and interest rate risk. You should be mindful of this fact.
  4. Portfolio composition
    It can happen that these funds lend their corpus to risky borrowers in order to enhance their returns. Hence, you need to examine the quality of funds comprising the portfolio. A high amount of low-quality debt is a red flag as a large default will plummet the fund’s value sharply, leaving no or minimal scope for recovery.

Final Verdict

Low duration funds can be a great addition to your portfolio. Now that you know everything about low duration fund meaning, suitability and benefits, why are you wasting your idle cash in bank accounts?  Remember every penny counts!

Are mid-cap mutual funds good for our portfolio? How to invest online?

Mid-cap Mutual Funds invest in stocks which rank between 101 to 250 in terms of market capitalization. SEBI guidelines mandate these funds to invest a minimum of 65% of their total assets in stocks of mid-cap companies. Generally, the market cap of these companies ranges between 5000 to 20,000 crores.

Mid-Cap Equity Fund Features

  1. Return

Companies in this category are in their “growth” stage. Unlike large-cap stocks (which have already reached their peak and are often market leaders), these companies are yet to reach their maximum potential. Hence, they have the potential to grow at a rapid pace and offer higher returns to investors. It is often said that the mid-cap today can be the large-cap of tomorrow!

  1. Risk

Mid-cap stocks are extremely sensitive to market volatility. In their attempt to grow faster, they might invest in riskier instruments. However, compared to small-cap funds they are relatively less risky.

  1. Investment Horizon

One of the most prominent equity fund features is the volatility faced by them in the short run. Hence, from an investment horizon perspective, holding them for a longer time makes more economic sense. Mid-cap funds require at least 7-10 years to generate their optimal result.

  1. Liquidity

Mid-cap mutual funds do not score very high on this parameter. Owing to a smaller capital base, these funds sometimes suffer from liquidity constraints. The liquidity score (a measurement of the time taken by a mutual fund scheme to liquidate their holdings) of mid-cap funds tends to be on the higher side.

  1. Valuation 

Mid-cap companies tend to be relatively under-researched and hence undervalued. Value investors believe that they can be a great means of long-term wealth creation when the markets correct itself and realize their intrinsic worth.

Are mid-cap mutual funds good for your portfolio

Now that you know the key mid-cap equity fund features, the question arises if they are a good decision for your portfolio. Mid-cap funds are suitable for investors who meet the following parameters:

  1. Risk Appetite

Investors who are looking for options to grow their wealth faster and have a high-risk tolerance can invest in these funds.

  1. Investment Horizon

Investors who have long-term financial goals or can remain invested for a long time period (minimum 7-8 years) will be able to make the most out of mid-caps.

  1. Age

As these funds take time to materialize into superior returns, sooner you start these investments, better it is. Hence, younger investors will get more time to remain invested and make higher earnings out of these investments.

However, do not make the below-mentioned errors while picking mid-cap funds.

  1. Mid-cap funds are a long-term commitment. The long-term outlook is a critical equity fund feature. Hence, while selecting the right mid-cap fund for your portfolio, do not take any decisions basis short-term market outlook.
  2. Your own asset allocation should dictate your mid-cap choice. Even the best fund will not be able to yield the desired results if it is not in sync with your personalized asset allocation.
  1. Past track-record of a fund, its star ratings, etc. are important selection parameters. However, you should not depend solely on any one of these factors. All of them needs to be analyzed simultaneously to arrive at the right decision.
  2. While we all look at numbers, trends and other data points while making our fund-related decisions, we often ignore the qualitative aspects. These factors (fund manager’s experience, portfolio characteristics, AMC’s investment philosophy, etc.) play an important role in a fund’s performance in the long run.

How to buy mid-cap funds online?

If you want to buy mid-cap funds online, you need to complete the KYC process and provide the necessary documentary proof (Photograph, Identity Proof and Address Proof). The KYC process can be done with any intermediary (SEBI authorized) such as the fund house, KRAs or online platforms.

Upon successful completion, you can choose the fund and start investing. It is an extremely simple and hassle-free process.

Final Words

If you have a strong risk appetite and can bear some short-term pains for long term gains, mid-cap funds are perfect for you. Especially when you can buy the mid-cap funds online from the comfort of your home, the gains on your investment seems even sweeter!

Tax harvesting – A way to save taxes on your capital gains!

How to reduce long term capital gains tax
The strategy which reduces your tax which is applicable to your Mutual fund’s long term capital gains is called tax harvesting. So what is tax harvesting and how it is applicable in reducing tax
To understand tax harvesting first have to understand how long term capital gain is taxed.
In 2018 Long term capital gain are reintroduced on equities
According to Rule In a financial year, More than 1 Lakh capital gain is taxed 10%
Therefore if you want to pay less tax or not to pay tax, You should ensure than your capital gain should not build up or cross the tax-free limit and that’s what called Tax harvesting all about
Tax Harvesting is a strategy in which you try to sell your mutual fund investments to book long term capital gain and reinvest in same mutual fund.

Difference between Tax Deduction vs Tax Exemption vs Tax Rebate

We easily understand terms like income or savings, because they are relatable. But, Tax Exemption, Tax Rebate, and Tax Deductions sound tiring and dull, even though these have the potential to reduce our tax burden.
lets under difference between Tax Exemption, Tax rebate, the Tax deduction
Tax Deduction: In simple word, through income tax deduction your gross taxable income become less and due to this deduction you pay less tax. The standard deduction is the first way of tax deduction.
Tax Exemption: Its meaning is you not need to pay Tax on some component of your income ‘
Tax exemption mainly allows salaried people to reduce their taxable income through different allowances like HRA, Travel allowance, LTA, Children education allowance, gratuity.
Tax Rebate: It is your final deduction or like final bargain after-tax exemption and tax deduction claims on your taxable income.

How to make a claim in your health insurance plan?

A health insurance policy comes to your aid in medical emergencies. It pays for the medical costs which you incur in case you or your family member gets hospitalized. The medical expenses can put a financial strain on you and when you have a health insurance plan, this strain can be minimized. That is why it is always recommended to invest in a good health insurance cover for yourself and your family.

While a health insurance plan can promise a good scope of coverage, you need to know the process of making a claim in your policy. Only when you follow the correct claim procedure can your health plan come to your rescue in a medical emergency. Many individuals are unaware of the claim process of health insurance plans and so here is the detailed guide to a health insurance claim process –

Types of health insurance claims

Health insurance claims or of two types – cashless and reimbursement. The cashless claim is when you seek treatments in a hospital which is tied-up with the insurance company. In such cases, the insurance company directly settles your medical bills with the hospital and you don’t incur the associated medical costs. Reimbursement claims, on the other hand, are incurred when you get treated in a non-network hospital. In such cases, you bear the medical expenses yourself and then get the expenses reimbursed from the insurance company.

The process of both these types of claims is mentioned below –

Process of cashless claims

  1. In case of any medical emergency which is covered under your health insurance plan, contact the insurance company to find the list of networked hospitals in your locality. The list can also be checked online on the insurance company’s website.
  2. Fill up a pre-authorization form for cashless treatments and submit it with the insurance company or its TPA (Third Party Administrator). The form is available at the hospital which is tied-up with the insurance company. The form should be filled and submitted within 24 hours of emergency hospitalization. In case of planned hospitalization, the form should be submitted at least 3-4 days before you get hospitalized.
  3. Based on the pre-authorization form, your cashless claim is approved by the insurance company
  4. Once the claim is approved, you would be able to avail cashless treatments at the hospital
  5. After you are discharged, collect all medical bills and reports from the hospital. Fill up a claim form and submit it with all the bills and reports for the full settlement of your claim.

Process of reimbursement claims

  1. If you are treated at a hospital which is not tied-up with your health insurance provider, you would have to pay all the medical bills from your own pockets
  2. Once you are discharged, collect the medical bills, reports and all hospital receipts
  3. Fill up a claim form and submit it with all the medical bills in original
  4. The insurance company would verify your claim and the associated bills and then reimburse you for the medical costs which you have incurred.

Documents required for a valid claim

Whether you avail a cashless claim or get reimbursement, the following documents would have to be submitted to the insurance company –

  1. The claim form, filled and signed
  2. Policy document
  3. Identity proof of the insured who is hospitalized
  4. Medical bills, in original
  5. Hospital reports and bills
  6. Doctor’s prescription which advised hospitalization
  7. Any other document as needed by the insurance company

Nowadays, health insurance companies have simplified their claim settlement process. They promise to settle your claims at the earliest if you follow the proper procedures and submit all the required documents. Especially in case of cashless claims, approvals can be received quickly if you fill and submit the pre-authorization form at the earliest. So, know the claim process of health insurance plans so that you can have a hassle-free claim experience when you suffer a claim.


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