What Are Debt Funds? What Are Its Benefits?
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There is a wide variety of investment advice in the market at all times and a large portion of it emphasises on which type of investments can yield the highest returns. However, what many fail to consider is that your portfolio also requires a degree of stability. To that end, fixed-income products, particularly debt mutual funds, should be an essential tool for every investor. Debt funds are accompanied with a specific set of advantages that often help investors ride through difficult market conditions and offer a distinct edge over other fixed income instruments.
What are Debt Mutual Funds?
Before delving into its many benefits, let us first review what debt mutual funds are and how they work. Debt funds typically refer to mutual fund schemes that invest in a variety of fixed interest earning instruments such as corporate bonds, government bonds, debt securities and debentures. Contrary to common belief, debt funds come in a wide variety of categories that range across tenures and risk appetites. Some popular categories of mutual funds include liquid funds, overnight funds, gilt funds, money market funds and dynamic bond funds. Investors are recommended to invest in debt funds offered by reputed institutes and managed by professional fund managers that can efficiently invest in high rated credit instruments.
Advantages of Investing in Debt Funds
There are a number of distinct benefits that debt funds can bring along to your investment portfolio. Here is a look at some of the major advantages of debt mutual funds:
1. Greater Liquidity
One of the highlights of investing in debt funds is that you can enjoy the benefits of an extremely liquid investment. As an investor, you have the option of withdrawing your debt fund investment whenever you require it most, and have it reflected in your bank account within just a day. Compare this to other fixed income instruments such as Fixed Deposits that require extensive paperwork and penalties, and the difference in liquidity becomes apparent.
2. Reduce Risk in Your Portfolio
As our life circumstances and priorities change over time, so does our risk appetite. There are bills to be paid and dependents to be looked after, which is why your investment portfolio should have a component to help you manage risk along the way. Debt funds help investors achieve this goal as they carry lower risk and are less volatile than other forms of market-linked instruments such as equity funds. By adjusting your debt fund instruments, you can considerably manage the entire risk factor of your portfolio.
3. They Offer Tax Benefit
While tax benefits are not a prerequisite for an investment, the most efficient investments in your portfolio are certainly expected to offer this distinct advantage. Debt mutual funds are helpful on this front, however, equity instruments are more tax efficient than debt instruments. Long term capital gains is 10% for equity MF and 20% post indexation for debt MF. Long term capital gains apply after 3 years of investment horizon. STCG for debt is as per tax slab and for equity it is 15%.
4. They Offer Flexibility
Among the various investments in your portfolio, debt funds can certainly contribute to the factor of flexibility. You can invest into your debt funds by the way of Systematic Investment Plans, or SIPs, whenever you get your hands on any additional income. You can also set up a Systematic Withdrawal Plan, or SWP to conveniently withdraw from your debt fund investment as per your needs.
5. Provide Stability and Regular Income
While you might have made a number of investments to provide you with varying degrees of interest amounts, your portfolio can also benefit from having a stable, regular source of income in the mix. This purpose is well served by debt mutual funds that might yield lower returns than your other investments, but will always be more stable, regular and predictable.
Conclusion
Debt funds add significant value to the portfolio of the average investor. No matter what your financial priorities are, and whether your focus is on short term or long term goals, there are a variety of debt mutual funds you can choose from to meet your specific requirements.
Also read- What Is Investing And What Does It Mean? Learn About Several Investment Options.
