Unlike equity funds, the debt funds do not really depend on long term holding. Since they are invested in debt instruments, these debt funds are more inclined towards safety, stability and liquidity rather than returns over the longer term.
Debt funds are seldom used as a wealth creating mechanism and the key driver for them is the outlook on interest rates. When rates are expected to go down, it pays to extend your holding in debt funds and when rates are expected to go up then it pays to reduce your holding in debt funds. This is a very important consideration when it comes to taking decisions on holding period for mutual funds. For example,equity funds and balanced funds attract short term capital gains tax if they are held for less than 1 year.
It pays to earn LTCG on equity funds as they are free of tax. The same logic applies to balanced funds too. However, the LTCG treatment is slightly different in case of debt and liquid funds. In this case, the definition of short term is up to 3 years. That is why most debt funds are structured as dividend plans to earn tax-free dividends.
As a debt fund investor you can combine your timing of purchase in such a way that you get the benefit of LTCG and of extra indexation. It does not matter whether your holding is in equity funds or in debt funds. If the particular fund was invested in to meet a specific goal then the holding period of that fund should be limited to achieving that goal. In case you have bought a debt fund or liquid fund for a 3year time frame to meet the margin money for your mortgage loan, then that is what should be the holding period.
The QAIB examines the real returns earned by investors in equity mutual funds, bond mutual funds, and asset allocation mutual funds. And unfortunately, the news just gets worse: In alone, the average equity fund investor generated Investors in bond funds did far worse. Compared to the Barclays Aggregate Bond Index which has a trailing year annualized return of 6.
Investors in bond funds underperformed their benchmark index by This is nothing new to professionals who study investor behavior: Investors invariably get out of the market after a decline and jump back in after a rally.
In other words, they tend to buy high and sell low. I wrote my summary of these issues back in May , almost exactly four years ago. The average bond fund investor has trailed the bond index by The closeness of this number to my estimate is, no doubt, partly coincidental.
In my article, I noted that the range of evidence suggested that bad timing was a major culprit in the poor performance experienced by retail investors. The average mutual fund equity investor holds a fund for an average of 3.
For bond fund investors, the average holding period is less than 3 years. Many investors have simply thrown in the towel on the idea of buy-and-hold investing because they believe that buy-and-hold has failed as a strategy. This is simply not true. These returns do not, of course, mean that these funds or their underlying indexes will return anything similar to these levels over the coming years.
In June , the company declared a two-for-one stock split. Paul then had shares of company stock with the same holding period, starting with the date of purchase in April Fixed Income Essentials. Investing Essentials. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.
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Personal Finance. Your Practice. Popular Courses. Investing Investing Essentials. What Is a Holding Period? Key Takeaways A holding period is the amount of time the investment is held by an investor, or the period between the purchase and sale of a security. Holding period is calculated starting on the day after the security's acquisition and continuing until the day of its disposal or sale, the holding period determines tax implications.
Holding period return is the total return received from holding an asset or portfolio of assets over a specified period of time, generally expressed as a percentage.
Holding period differences can result in differential tax treatment on an investment. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
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