Debt Funds: Know Everything about Them Here

Just as equity mutual funds allow you to invest your money in equity shares of companies, the debt mutual funds allow you to invest in debt instruments such as corporate bonds, treasury bills, government securities, money market instruments, etc. 

However, one thing that needs to be mentioned here is the fact that when it comes to investment, equities usually steal the forefront, but there is no denying the fact that debt funds too have impeccable qualities, making them an admirable asset class. Those who invest in funds, having in-depth knowledge of the industry or someone who is a smart investor knows very well how to diversify, mitigate risk, protect his capital and earn steady and sustainable returns while investing. 

Well, most of the aforesaid points require a strategy of both equity as well as debt. However, either of them in isolation may not serve the purpose. So, without wasting any time further, let’s just take a look at some of its highlights to know what makes debt a core ingredient of a financial portfolio.      

Wealth Creation

If we talk about debt securities, they usually best known to generate stable and sustained returns, having lower risk as compared to equity. It is a also a fact that wealth creation is a long-term process so one can have other ways to grow money such as by reinvesting the earning into the funds or by enhancing the growth process through compounding. Well, the publicly available credit ratings for debt securities can further help in the selection process.

Risk Mitigation

As you known that debt funds are generally known for showing the stability , thus the investors need to bear the lower risk. However, debt might gives you lower return than equity funds but it gives relative safety of capital. And, this makes it an integral part of the portfolio, aimed at earning long-term risk adjusted returns.

Relatively Less Volatility

As debt instrument prices have lower volatility, thus the chances of capital loss is lower. As a result of which, over short to medium terms, it would not be wrong to say that the debt instruments usually tend to deliver performance. So, investing in the same could ensure your investment capital is protected and the portfolio is positioned so as to sail through the market conditions.

Liquidity Arrangement

As returns on debt securities majorly move in a small range, thus it would not be wrong to say that using debt funds as a tool actually helps you to manage the short-term liquidity needs. You can understand this thing in a way that they can be looked from the point of investing for a shorter duration as they fluctuate less in the short term and give moderate returns. Talking about liquid funds, for example, they are considered as an ideal investment option for the short term as the money can easily be liquidated. So, there is no denying, your intermittent goals like a near term vacation could easily be planned.

The Tax Aspect

When it comes to income earned from investing in debt securities held for less than 3 years are actually treated as short capital gains and are taxed at the applicable tax slab for an individual. But, one thing that needs to be mentioned here is the fact that investments held for more than 3 years are taxed at a fixed rate of 20% along with indexation benefits. Well, which means that a long-term investment strategy, focusing on debt securities can actually lead to significant tax efficiency.

Thus, debt investments are traditionally to be considered as a safety avenue, thus also yields significant short-term returns. So, it would not be wrong to say that it is vital for debt funds to be a core holding in a portfolio.

An Overview of Various Debt Investment Options

Type of Fund: Liquid Funds

•           Target Investments:Very liquid money market securities
•           Tenure of Investment: Not more than 91 days
•           Risk Factor: Low Risk
•           Suitable For: Investor/s with excess cash seeking a low-risk option to earn interest  

Type of Fund: Ultra Short Term Funds

          

• Target Investments:Short-term securities
• Tenure of Investment: Up to 12 months
• Risk Factor: Moderately Low Risk
• Suitable For:Someone seeking higher returns as compared to traditional debt  instruments without locking funds for more than a year

Type of Fund: Short Term Funds

• Target Investments:Short-term debt instruments

• Tenure of Investment: Between 1 and 3 Years
•  Risk Factor: Moderate to Low Risk
• Suitable For:Individuals with an investment goal of a few years. One should ideally invest for at least 3 years

Type of Fund: Dynamic Bond Funds

• Target Investments:Amalgamation of debt securities and money market instrument
• Tenure of Investment: Short-term with maturity depending on the choice of security
• Risk Factor: Medium Risk
• Suitable For:Individuals seeking to invest in all classes to debt securities with varying maturity periods

Type of Fund: Income Funds

• Target Investments:Securities that offer dividends or interest payments
• Tenure of Investment: Tactical allocation
• Risk Factor: High Risk
• Suitable For:Change in rates can adversely impact the investment value. So it comes with higher risk along with higher returns.

Type of Fund: Gilt Funds

• Target Investments:Government Bonds
•  Tenure of Investment: Tactical allocation
•  Risk Factor: Low Risk of default with high risk of impact of interest rate changes
•  Suitable For:Low yielding. Government bonds have virtually zero risk of default.

Type of Fund:Debt Oriented Hybrid Funds

• Target Investments: Debt securities with around 10% to 25% invested in equities
• Tenure of Investment: Medium to Long Term
•  Risk Factor: Medium to High Risk
•  Suitable For:Those who are looking for the stability of debt and growth of equities, can go ahead

Type of Fund:Fixed Maturity Plans

• Target Investments: Debt securities
•  Tenure of Investment: Most beneficial if held for a long term
•  Risk Factor: Low Risk
•  Suitable For:Open-ended funds, structured like FD. Money is locked for a fixed tenure, offering stable returns, tax benefits, especially for high income earners.

Disclaimer - Mutual Funds are subject to market risks. Please read the scheme related documents carefully before investing.