Debt funds are mutual funds that invest in fixed income securities like bonds and treasury bills. Gilt fund, monthly income plans (MIPs), short term plans (STPs), liquid funds, and fixed maturity plans (FMPs) are some of the investment options in debt funds. Apart from these categories, debt funds include various funds investing in short term, medium term and long term bonds. Debt funds are preferred by individuals who are not willing to invest in a highly volatile equity market. A debt fund provides a steady but low income relative to equity. It is comparatively less volatile.
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What Is A Debt Funds
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Benefits Of Debt Funds
High liquidity: Debt mutual fund schemes are often seen as an alternative investment to fixed deposits – as they provide income over time. Fixed deposits usually have mandatory lock-in periods and/or take a long time to process withdrawals when an investor wishes liquidate the investment. Debt mutual fund schemes, especially liquid funds, have a high degree of liquidity and investors can ‘cash out’ their investment far more quickly than most other comparable investment options.
Tax efficiency: While it is true that long-term and short-term capital gains tax does apply on debt mutual fund schemes, it should be noted that the benefit of indexation increases after three years of holding and with each passing year after that. Also, debt schemes are not affected by TDS. Alternative investment options like fixed deposits have a straight deduction of 10.3% if the interest income exceeds Rs.10,000 in a single year. The income on fixed deposits is also taxed every year from the start of the deposit, but the total money earned will only be accessible on plan maturity.
Flexibility: Money that’s been invested in a debt fund scheme can often easily be transferred to an equity scheme or any other scheme of the investor’s choosing. Alternative investment options do not provide this level of flexibility to investors – e.g. fixed deposits can only be opened or closed, not transferred.
Higher returns: When compared to the traditional options like savings bank accounts or fixed deposits, debt mutual funds offer the possibility of far higher returns.
One of the safest funds that provide a reasonable rate of return
Invests in different asset classes for a diversified portfolio
Debt fund that invest in government securities
Fund that primarily invests in stocks
Who should invest in Debt Funds?
Debt funds are suitable for risk-averse or for those who are not ready to have equity exposure. Debt funds grow investors’ wealth with little to no risk. Additionally, these funds strive to provide regular income. Investors usually stay invested in debt funds for a short to medium-term horizon. You need to choose an appropriate debt fund as per your investment horizon. Liquid funds may be suitable for a short-term investor who generally parks his or her surplus funds in a savings bank account. Liquid funds provide returns in the range of 7-9%. They also offer flexibility in terms of withdrawals at any time, just like a regular savings bank account.
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