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What are Debt Funds?
Debt funds are such mutual fund schemes that invest in fixed-income securities such as Corporate Bonds, T-Bills, government securities, Commercial Papers (CP), Certificates of Deposit (CD), and other money market instruments. These instruments have a fixed interest rate and maturity date. They may be less volatile and ideal for relatively risk-averse investors.
What Are The Types of Debt Funds Available in the Market
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There are numerous types of debt mutual funds available for investment. Investors can choose a fund based on their investment objective, risk profile and preferred maturity period.
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Overnight Fund
These funds invest in securities with a maturity period of 1 business day only. Overnight funds carry interest rate risk and minimal credit risk owing to a very short maturity period. -
Liquid Fund
Liquid Funds invest in debt and money market securities with a residual maturity of up to 91 days. The instruments are fairly liquid and have the potential to offer returns. Some liquid funds also provide an instant redemption facility, allowing redemption of up to ₹50,000 per day per investor -
Ultra-Short Duration Fund
Ultra-Short Duration Funds invest in money market instruments and debt securities such that the Macaulay Duration of the portfolio is between 3-6 months. -
Money Market Fund
Money Market Funds invest in money market securities with a maximum maturity of 1 year. This fund is a good alternative to park surplus money for the short term. It can also be used as an emergency fund as it is relatively highly liquid and has the potential to generate returns than traditional avenues. -
Short Duration Fund
Short Duration Fund invests in debt securities and money market instruments. These instruments typically have a maturity period of 1-3 years. -
Banking & PSU Fund
Banking & PSU Fund invests a minimum of 80% of its assets in Debt securities of Banks, PSU (Public Sector Undertakings), Public Financial Institutions and Municipal Bodies -
Gilt Funds
Gilt funds are mutual fund schemes that invest at least 80% of their assets in government securities with varying maturities. They are considered a good investment since the exposure is given to sovereign papers. This makes gilt funds a good investment choice for risk-averse investors.
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Overnight Fund
Why Should you invest in Debt Funds?
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- 1. Independent: Equity markets are highly volatile in nature. However, Debt mutual funds may not be affected by the stock market's volatility. Investment in debt funds is not subject to any such fluctuations in the market.
- 2. Liquidity: Debt funds provide a high degree of liquidity compared to most asset classes today. You can easily withdraw your investment from the debt fund based on your requirements.
- 3. Flexibility:The investment tenure or horizon refers to the period of your investments. The tenure often ranges from a period as short as three months or can spread over three years. Debt mutual funds have a flexible investment horizon catering to any investment goal.
- 4. Low risk: Debt funds usually carry lower risk. Unlike equity funds, an investment portfolio under debt funds may not be exposed to market volatility. However, they are not entirely risk-free.
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What is the Taxability of Debt Mutual Funds
The recent changes made in the Budget 2023 have led to some noteworthy modifications. As per the new laws, debt funds will no longer be eligible for indexation benefits while calculating long-term capital gains (LTCG). Therefore, the tax on capital gains will be levied based on the investor's income tax bracket, irrespective of the holding period of the fund.
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Who should invest in debt funds?
Debt mutual funds might be a good investment alternative if you are looking for any of the following:
- You are new to the world of investments and unsure where to begin setting up an investment objective.
- You are looking for short-term investments with a low level of risk.
- You want your investment in fixed-income securities.
- You have a stable income and are looking for ways to supplement your monthly income.
Debt funds are available for all the required investment durations. Therefore, you should choose as per your investment tenure and financial goals. Whatever the reason, ensure that you invest according to your investment plan.
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