Every individual has different materialistic aspirations. Some have short term goals like buying a new car, while others have long term goals like buying a weekend home or going on foreign trips post-retirement. The list of one’s desires (especially monetary) can be never ending, but to fulfil these desires, it is necessary to have financial stability. And in order to grow your wealth, you need to start investing.
Depending on an individual’s financial goal and appetite for risk, they should think about what kind of investment to choose. There are several types of mutual funds available in the market catering to almost every investor’s requirements. Mutual fund investments are a great way of building wealth as you can invest via lump sum or opt for SIP investment.
SIP means a systematic investment plan where the investor invests a predetermined amount on a fixed date of every month. When an investor pays a lump sum, he/she is paying the entire investment amount at the beginning of the investment cycle. So depending on your needs and appetite for risk, you can choose a mutual fund in order to achieve your financial goal.
Equity oriented schemes are usually opted by those investors who have a long term investment horizon. But if you are someone who has a short term investment horizon and do not wish to expose your investments to the dangers of equity, you can consider investing in debt mutual funds.
What are debt mutual funds?
Debt mutual funds are a type of mutual funds meant for investors who want to stay away from market volatility and don’t mind earning lower but fixed gains. In debt mutual funds, the corpus is primarily invested in fixed income securities such as government bonds, treasury bills, corporate bonds or construction bonds, and money market instruments.
The interest rate earned on debt mutual funds is lower as compared to equity funds. That is because debt funds help generate steady income and keep the investor away from the unpredictable market. So, even though you fetch lower returns as compared to equity funds, you do receive some amount of returns when invested in debt mutual funds.
Let’s take the example of Gayatri Bhosale, an IT professional who started investing in debt mutual funds in 2016. Today after three years, she was able to build a marriage fund from her mutual fund investments and debt funds played an equally important role in helping her build this short term corpus.
Even you, just like Gayatri, stand a chance to meet your short term goals by investing smartly in debt mutual funds.
Are there any benefits of investing in debt funds?
What is better- FDs or Debt Funds?
Let’s compare FDs and debt funds on the basis of liquidity, risk, and taxation to identify which one is a better investment option.
- Liquidity: Debt funds offer high liquidity and an investor, as per his/her need or requirement, can withdraw their money or units from his/her debt fund on any business day.
- Diversify risk: Debt funds invest in fixed income securities like government securities, corporate bonds, and similar money market instruments. Thus, debt funds are successful in balancing risk and can also help in diversifying your overall portfolio.
- Taxation: Debt funds are tax-efficient, and several investors invest in debt funds for this particular reason. Debt funds are a type of mutual funds and gains derived from mutual fund investment before three years are taxed as per the lax levied on short term capital gains (STCG). If you hold your investments for more than one year than you pay long term capital gain (LTCG) tax.
Types of debt funds you can invest in
Debt funds are further categorized, and investors as per their investment objective and investment horizon can decide which type of fund to invest in. Here are some of them:
- Overnight funds: The overnight mutual funds come with a maturity period of just one day. These are open ended debt funds which invest in overnight securities.
- Liquid funds: These are open ended debt funds which come with a maturity of up to 91 days. This makes them almost risk free because they come with such a short maturity period.
- Money market fund: This debt fund invests in overnight securities having a maturity of just one year. Money market funds are open ended debt schemes which invest primarily in money market instruments.
- Gilt funds: Risk averse investors can invest in these funds, which primarily invest in government securities. These open ended debt funds invest in top rated securities and hence carry very low risk.
- Dynamic bond funds: Here, the fund manager keeps shifting the composition of the corpus depending on the shift in interest rate. These open ended debt funds invest in securities with shorter as well as longer maturities.
- Short and ultra short funds: These open ended debt funds are good for traditional investors as these funds rarely get affected by the fluctuating interest rate.
We hope that the above article was capable of giving you a brief introduction about debt funds. You also have information about some of the debt fund’s sub categories. We request you to make sure that all your investments stay aligned with your ultimate financial goal.
Salman is a prolific environmental writer, and has authored more than 500 articles in reputed journals, magazines and websites. He is proactively engaged in creating mass awareness on renewable energy, waste management, sustainability and conservation all over the world.
Salman can be reached on salman@cleantechloops.com
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