Debt Funds
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A debt mutual fund, commonly referred to as a fixed-income fund, invests a sizable amount of your funds in fixed-income assets including corporate bonds, government securities, and other money-market instruments. Debt mutual funds significantly reduce the risk element for investors by investing in such areas. This is a somewhat secure investment option that could lead to financial success.
HOW DO DEBT FUNDS WORK?
Debt funds invest investors' money in assets like bonds and other fixed-income instruments in an effort to produce returns for them. In other words, these funds invest in bonds and receive interest payments. Based on this, mutual fund investors receive returns.
This operates in a manner similar to a fixed deposit (FD). You are technically lending money to the bank when you deposit money there. The bank provides interest revenue on the borrowed funds in exchange.
Who should invest in debt funds?
Debt funds are best suited to investors seeking modest risk. Investing in debt mutual funds is less risky than investing in equity funds. If you have a low risk tolerance, these funds may be a good fit for you.
FACTORS TO CONSIDER WHILE CHOOSING A DEBT FUND
Think about the risk when choosing a debt fund. Despite the safety of a bank savings account, debt fund securities are prone to credit risk. Select a debt fund with the lowest risk possible as a result.
Consider money market funds, short-duration funds, overnight funds, ultra-short-duration funds, and liquid funds when selecting a debt fund. In comparison to other funds, the credit risk and interest rate risk associated with these funds is quite modest. Consider factors such fund returns, fund manager, assets under management (AUM), scheme portfolio, expense ratio, etc. in addition to the risk profile.
TAXATION : BANK SAVINGS ACCOUNT VS DEBT FUND
When choosing between a debt fund and a bank savings account, take taxation into account.
Interest earned on savings accounts is taxed at the individual's slab rate. However, a person may deduct up to Rs 10,000 in interest payments paid in a particular fiscal year under Section 80TTA of the Income Tax Act. If units are sold within three years of purchase in a debt fund, short-term capital gains are taxed at the individual's slab rate. If the units are sold within three years after purchase, long-term capital gains are taxed at 20% with the benefit of indexation.
What are the benefits of investing in Debt funds?
1. Stable income - Debt funds have the ability to provide capital growth over time. Despite having a lower level of risk than equity funds, returns from debt funds are not guaranteed and are subject to market risks.
2. Tax efficiency - Many people invest money primarily to lower their yearly tax expenses. Therefore, you can think about investing in debt mutual funds if tax minimization is a top financial priority. This is so that debt funds, as opposed to conventional investment options like fixed deposits (FDs), are more tax-efficient.
3. High Liquidity - There is a predetermined lock-in period for fixed deposits. The lender may assess fees if you prematurely liquidate your FD. While there are no lock-in periods for debt mutual funds, some of them have exit loads, which are fees deducted at the source for early withdrawals. Different funds have different exit load periods, and other funds have no exit load at all. On any business day, you can withdraw money from debt mutual funds because they are liquid. there is a predetermined loc
4. Stability - Investing in debt funds can also help you boost your portfolio's balance. While equity funds have a higher return potential, they can be volatile. This is due to the fact that the returns on equity funds are directly related to the performance of the stock market. You can diversify your portfolio and reduce overall risk (cushion the downside) by investing in debt funds.
5. Flexibility - Debt mutual funds also allow you to move your money around to different funds. A Systematic Transfer Plan (STP) allows for this. You can invest a big sum in debt funds and then systematically shift a small piece of the fund into equity at regular intervals. This manner, you can spread the risk of shares over a few months rather than investing the entire amount all at once. Other traditional investment options do not provide investors with this level of flexibility.
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