For risk-averse investors, debt funds are a great place to park their savings as they generally provide better post-tax returns compared to fixed deposits or your savings account.
Lower risk than equity: Many debt instruments, especially those with a sovereign rating, carry no credit risk. Debt funds are less volatile than the equity markets and provide a cushion against stock market risks.
Stable returns: Debt funds invest in fixed income securities, so you will likely benefit from the stable returns these funds provide.
Managed by experts: Debt is a complex asset class that offers you a way to invest in a professionally managed and curated debt portfolio.
Choice: SEBI has specified 16 categories of debt. So, whether you need to invest money for the short-term or park your savings for the long-term, you will find a debt fund that meets your needs.
Tax treatment: Unlike fixed deposits, debt funds offer better post-tax returns, especially those in the higher income brackets.
JM Financial Services Limited brings you a wide selection of debt schemes across mutual fund houses. Use our screeners and interactive tools to find a fund that meets your risk appetite, financial goals, and investing philosophy.
FACTBOX
A debt fund is a mutual fund scheme that invests in debt instruments such as government securities, corporate bonds, and money market instruments. These are fixed-income funds that provide capital protection plus reasonable returns. ICICI Prudential Gilt Fund and SBI Magnum Gilt fund are examples of debt funds.
Investing decisions should always be based on your objectives, risk appetite, and returns expectations. Debt funds do deserve a place in well-diversified portfolios. If you want to invest in instruments that carry low risk with steady returns, you may want to consider debt funds.
The Securities and Exchange Board of India specifies 16 categories of debt funds, each with different profiles and investment objectives. So, among these 16, choose a category that works best for your needs and objectives. For example, if you want to park your funds for a short time but want high liquidity and safety, opt for overnight or liquid funds. If you are averse to credit risk, opt for funds that invest primarily in government securities.
Apart from the category, you should look at expense ratio, exit load, how the fund performs across interest rate cycles, the quality of the debt paper it invests in, and how it has performed against peers and the benchmark.
Debt funds do not have a lock-in period. But some funds do charge an exit load if you liquidate your holdings within a certain time.
Debt funds are a good way to diversify your portfolio and mitigate risk. Here are some of the benefits of a debt fund:
- Wide choice: Debt funds come in 16 varieties, and you can choose from 100s of schemes.
- Steady returns, low risk: Debt funds invest in fixed income securities and, therefore, offer steady returns at reasonably low risk
- Liquidity: Unlike fixed deposits, debt funds are highly liquid and have no lock-in period.
- Tax efficiency: Debt funds are more tax-efficient than FDs, especially for those in higher income brackets. If you Redeem a debt fund before 3 years, you will have to pay short-term capital gains according to your tax slab. If you redeem it after 3 years, you are liable to pay tax at the rate of 20% with indexation benefit. Indexation adjusts purchase price for inflation. The longer you hold your funds, the greater the indexation benefit. You can bring down the tax rate from 20% to 6-7% if you hold your debt funds for 5 years or longer.
- Low cost: Debt funds typically have lower expense ratios than actively-managed equity mutual funds.
Debt funds invest in a mix of fixed income securities such as corporate bonds, government securities, and money market instruments like T-bills. Based on the category of fund and profile of the scheme, debt fund managers allocate the corpus to different debt securities. Fund managers invest in securities that have a similar maturity profile as the scheme
No, debt funds are not risk-free. However, they tend to be less risky than asset classes like equity. Debt funds carry two types of risk: credit risk and interest-rate risk. Credit risk is the risk of default on a security that the fund owns. Fund managers mitigate this by investing in top-rated paper.
Debt fund returns are linked to interest rates. Changes in these rates can affect the returns of your debt fund. Typically, when interest rates rise, bond prices fall, and your debt fund will underperform.
