r2i forum

Hi,

I came across a new NFO for a 3 yr closed fund.
my goal is to move some FDs into this fund instead of renewing them as FDs.

http://www.idfcmf.com/downloads/22June2010-launch-SID.pdf

seems like an ideal investment for folks with a 3 year horizon who want better than FD rates.
would you agree that the risk is low - almost as safe as an FD and returns would be higher than FDs ?

would you recommend any debt funds which are safer than this and would meet my objective of beating FD rates (post tax in the highest tax bracket)

How can we beat the rate of Bank FD's by investing in this? The brochure states that there is an AMC of 2.25 %.

-M

AMC charges of 2.5% is not unusual - most MF have similar AMCs.

as for returns, here is a clipping from the pdf file attached:

Investment Strategy
The scheme will endeavor to achieve stability of capital (with an intent to protect capital) and generate
reasonable return by building a portfolio that is a judicious mix of safe debt and money market instruments
and good quality equity instruments. The debt and money market instruments would bring about the safety
element in the scheme and the well researched good quality equity instruments would enable the scheme to
provide reasonable returns. Such asset allocation would inter-alia depend on various parameters like the
level of interest rates in the economy, underlying economic growth rates, inflation, conditions of the equity
markets, profitability of the corporate sector etc. The scheme will try and shift allocations from equity to
debt and vice-versa on a regular basis so as to achieve the stated objected of the scheme.

obviously I am not an expert and hence I am trying to see opinions from this forum.
The above strategy sounded like a safe investment where because of the 10-15% exposure in equity it acts similar to some debt funds and thats why I was asking if this would be one of the safer options due to its closed nature.

Thanks for the details:

While high AMC's are justified for equity MF's, it will be quite difficult for a debt based MF to realize above FD returns after deducting such high AMC. Again, there are exceptions, and I hope this belongs to that category.

The only way these guys can do it, is on the 15 % allocation to equity, which is by and large dependent upon the selection.

One way of looking at this is - For a duration of 3 yrs, today's FD rates (Banks and NBF), say is providing us 8%.
If you have 10 lacs to invest, you can set aside 8 lacs in one of the FD's or NBF's fixed deposits for 3 yrs, which will return you back 10.07 lacs end of 3 yrs. Your capital is protected.

With the remaining 2 lacs - you can either selected good MF's your self and invest OR invest 1 lac in a mutual fund.. and with the remaining 1 lac, you can buy a 3 year derivative/call options on the sensex or Nifty index.

Even if the market Tanks, and you lose the entire 1 lac on the call option, your MF end of 3 yrs will be somewhere less than 1 lac, which added to 10.07 lac will come out better.

Catch here is.. - if you had invested the entire 10 lacs with 8% FD, you would have guaranteed return of 12.6 lacs.