Safety, Taxation And Returns: Refresher On Debt Funds

Do you want to invest more wisely to make your money grow? Begin by learning about financial planning. As a conservative investor, if you wish to invest in mutual funds, a debt mutual fund could be your go-to option. Debt is one of the major markets where you can invest to increase your wealth. Conservative investors find it easy to put their money in debt funds, as these generate regular income and are considered less risky than equity investments.

Mutual fund schemes like debt funds invest in instruments like bonds, debentures, government securities, etc. When any company requires money, they borrow from investors by issuing debt instruments. In return, the investors receive regular interest.

Types of debtmutualfunds

Debt mutual funds are sought by investors looking for portfolio diversification. Following are a few types of debt funds:

  • Liquid funds

As the name suggests, these Liquid mutual funds are highly liquid. These funds invest in debt instruments with a maturity period of up to 91 days.

  • Money market funds

This debt fund deals in short-term securities where the maturity period ranges anywhere from one day to one year.

  • Gilt funds

These funds invest in collaterals issued by the central or state governments. As these securities are issued for longer maturity, they do have interest rate risk.

  • Income funds

Investment in income funds means a greater possibility of a stable rate of returns in all market conditions.

  • Fixed maturity plans

These plans are closely related to fixed deposits. These plans have a compulsory lock-in period, depending on the scheme chosen by the investor. In fixed maturity plans, investments have to be made once during the initial offer period after which no investment is allowed.

Why invest in debt mutual funds?

As an investor, it’s worth keeping in mind that the instruments in which debt fund schemes invest are rated by credit rating agencies. The credit rating shows its creditworthiness. Further, debt funds are not directly affected by fluctuations in the share market.

Now, if we talk about debt funds and interest rates, the concept gets a bit complicated. In the case of decreasing interest rates, debt funds tend to perform well because the bonds nearing maturity tend to have less impact due to changes in interest rate.

If you want to redeem your units, debt funds give you the liberty to have your money back on any business day. And unlike the traditional fixed income investing schemes, debt funds are more taxefficient. Debt funds are taxed the year you redeem them.

Who should invest in debt funds?

  • Investors searching for portfolio diversification
  • Suitable for beginners with a low-risk appetite
  • Apt for investors with short to medium-term financial needs

Consider debt funds for your financial goals

If you are unhappy with the current rate of returns provided by your savings account or bank deposits, investment in debt funds could be an option for you. Debt funds tend to be a safe investment for conservative investors who are looking for fixed income funds. The earlier you invest, the better. But remember, successful investing is a journey, not a one-time process.