Debt mutual funds are funds\nthat invest in fixed-income instruments such as corporate and PSU companies\u2019\nbonds, government bonds, commercial paper and so on. Investors put their money\nin debt funds as a hedge against volatility in the capital markets. While\nequity investments can shoot up or plunge quite rapidly, debt funds are a stable refuge to\nbuild a strong moat one can rely on in choppy markets.<\/p>\n\n\n\n
Let\u2019s take a look at the major advantages of having debt funds in your portfolio:<\/p>\n\n\n\n
Investment\nin a debt mutual fund is considered more liquid than even\nfixed deposits. While you can cash in on your debt fund investment on a day\u2019s\nnotice, breaking your FD could take more time since it generally involves some\npaperwork rather than just a tap on your phone screen or the click of a mouse.\nMoreover, you can liquidate a debt mutual fund SIP without attracting any\ncharges from a fund house whereas a bank will levy a penalty for withdrawing\nyour FD money before maturity.<\/p>\n\n\n\n
Now\nmutual funds also provide an instant liquidity option under the instant redemption\nfacility in liquid funds for withdrawals up to Rs 50,000 <\/p>\n\n\n\n
Additional Read:<\/strong> What are the benefits of\ninvesting in Liquid Funds?<\/a><\/p>\n\n\n\n Investing\nin a debt mutual fund is more beneficial on the tax front in the long run than\nan equity investment or a fixed deposit. Returns from an equity scheme will\nattract a short term capital gains tax of 15% if the investment is sold before\na year and long term capital gain tax of 10% for investments sold after a year.\nIf debt mutual fund investments are sold before three years\nthen the returns are added to the total income and taxed as per the applicable\nincome tax slab.<\/p>\n\n\n\n Capital\ngains are taxed at the marginal tax rate i.e. the gains are added to the total\nincome and taxed as per the applicable income tax slab. While holdings greater\nthan 3 years will be able to reap the benefit of indexation which is not\navailable in equity. In Indexation your capital gains are adjusted with respect\nto inflation and then taxed. As such the longer you hold your debt mutual fund investment, the greater will be the benefit from indexation.<\/p>\n\n\n\n If your\nFD returns amount to more than Rs 10,000 then the bank will deduct TDS.\nMoreover, returns from an FD are taxed every year whereas that from a debt fund\nis taxed only on withdrawal.<\/p>\n\n\n\n Investment\nin debt funds could earn you higher return on capital than other debt options like\nbonds and fixed deposits. While bond yields and FDs are dependent on interest\nrates set by the central bank, debt\nfunds put your money in a motley combination of\ndebt instruments such as commercial papers, corporate and PSU bonds etc. that may\nnot suffer a first order impact of frequent rate changes. <\/p>\n\n\n\n Another\nimportant merit to consider is that debt funds can work to your advantage in\nboth interest rate scenarios \u2014 when it\u2019s rising and when it\u2019s falling. This can be achieved by selecting the funds\nthat benefit in these scenarios. For example, dynamic\/ duration funds can\nbenefit from falling interest rates while accrual funds can be better in a\nrising interest scenario.<\/p>\n\n\n\n If you\ninvest in a debt fund SIP, you could devise an SWP (systematic withdrawal plan) to regularly take\nout an amount from the investment. This SWP option is also more tax efficient\nfor investors who need regular income and are in higher tax brackets instead of\ndividend options.<\/p>\n\n\n\n There\u2019s\nalso the flexibility to shift your money to a different scheme in the same fund\nhouse if you think the markets are going in a particular direction and are\nexpected to stay the course for the time being. This can be done to invest in\nequity funds systematically from liquid\/debt funds.<\/p>\n\n\n\n If you invest in a fixed deposit account\nor bonds, the money either tends to get used after the term of the investment\nor it stays idle until you decide where to invest it. The advantage in an open\nended debt mutual fund investment is that the money will never\nbe idle and grow each day.<\/p>\n\n\n\n Additional Read: <\/strong>Advantages of Having Debt Mutual\nFunds in Your Portfolio<\/a><\/p>\n\n\n\n Whether you have a low or\nhigh appetite for risk, debt funds serve an important role to balance a\nportfolio. It ensures that the low risk investor has money parked in an avenue\nwhere it is growing in a stable manner and can be redirected at short notice if\nthe markets are on an upward swing. Moreover, if you have a low risk appetite\nthen you can also use it as an easy fallback option. For an investor with a high risk appetite, a\ndebt fund can be used to absorb shocks from volatile equity market conditions.<\/p>\n\n\n\n It is a good idea to\nperiodically switch funds from growth investments like equity to lower risk\ndebt mutual funds. This lends some much needed balance to the portfolio as\nfinancial goals appear on the horizon. The investor stands to benefit on both\nends when using it as a periodic exit or investment strategy. While the risk of\ncashing in on investments from an equity MF when its value is low is avoided,\nthe periodic strategy tends to minimize the blow from a high entry point to a\nlarge extent.<\/p>\n\n\n\n Debt funds are considerably\nlow-risk mutual funds and can be opted for by risk averse investors as well as\naggressive investors. While the conservative and a balanced investor should\nhave it in their portfolio, growth and high growth investors should keep it to\nabsorb the shocks of the equity market. Whether you want to plan for your\nretirement or invest to achieve a financial goal such as a house or a trip\nabroad, Tata Capital Wealth Management Solutions<\/a> can help you achieve it with the right mix of debt fund investments,\nequity investments and other categories based on your needs and priorities.<\/p>\n","protected":false},"excerpt":{"rendered":" Debt mutual funds are funds that invest in fixed-income instruments such as corporate and PSU companies\u2019 bonds, government bonds, commercial paper and so on. <\/p>\n2. Tax benefits are better<\/strong><\/h2>\n\n\n\n
3. Better returns compared to peers<\/strong><\/h2>\n\n\n\n
4. Flexibility<\/strong><\/h2>\n\n\n\n
5. Money never sleeps<\/strong><\/h2>\n\n\n\n
Planning your debt fund investment<\/h3>\n\n\n\n
Conclusion<\/strong><\/h3>\n\n\n\n