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| November 9, 2022

Benefits of investing in a debt fund

Investments are done to achieve financial and personal goals and hold a different meaning for different people. These goals could either be short-term or long-term. An investor needs to understand his/her risk appetite and personal aptitude before deciding on an investment. For some, an investment could be purely financial such as wealth accumulation for goals such as retirement, children’s education or marriage, etc. Personal goals could be to maintain the same or a better lifestyle at a later stage of life. And different types of mutual funds are an excellent tool to achieve both. The best mutual funds are ones that are professionally managed, transparent, and have the potential to generate good returns on your capital.

What Are Mutual Funds?

Mutual Funds have gained a lot of popularity among investors owing to the multiple benefits offered by them. A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. They are relatively less expensive when compared to directly investing in the capital markets because of the benefits of lower brokerage, transaction, and other fees. And these translate into lower costs for investors. It is a professionally managed asset class that offers wealth accumulation through diversification of risk.

Types of Mutual Funds

Mutual Funds can be classified into various categories based on structure, asset class, investment objective, the market capitalization of the invested companies, specialty, and risk. The most commonly used classification is the one based on the asset class. There are four main mutual funds types based on this categorization.

  • Equity Funds: These are funds that invest in equity stocks/shares of companies and are typically considered high-risk-high return funds.

  • Debt Funds: The meaning of debt fund is that it invests in debt instruments e.g. company debentures, government bonds, and other fixed-income assets. They carry a low risk and are considered safe investments. These are more tax efficient than bank FDs.

  • Money Market Funds: These invest in debt securities characterized by short maturities, minimal credit risk, and high liquidity such as Treasury Bills. These are ideal for parking surplus funds for the short term.

  • Balanced or Hybrid Mutual Funds: This type of mutual fund invests in a mix of asset classes, including both equity and debt. The goal of a hybrid mutual fund is to reduce risk by further diversifying the investors' portfolios.

For an investor, selecting a mutual fund portfolio should be in alignment with his/her financial goals and risk appetite.

What are Debt Mutual Funds?

Debt Mutual Funds are funds that invest in fixed-income instruments such as corporate bonds, government bonds, treasury bills, certificates of deposits, etc, Debt Fund investments are also sometimes referred to as fixed-income funds or bond funds. The fundamental objective of investing in debt funds is to earn a steady interest income and capital appreciation.

Debt funds are best suited for investors with a short-term and medium-term investment horizon.

  • Short-term Debt Funds: The tenure of a typical short-term debt fund is three months to one year. The best debt mutual fund for the short term is a liquid fund which is ideal for parking surplus funds for a short duration. The expected returns are returns in the range of 7%-9% but that is not guaranteed.

  • Medium-Term Debt Funds: These debt funds have an investment horizon of three years to five years. Dynamic bond funds are one of the best debt funds to invest in for this tenure.

Advantages of Investing in Debt Funds

An ideal investment portfolio has a balanced diversification of different asset classes, allocated according to your risk appetite and financial goals. The inclusion of debt mutual funds is ideal for a risk-averse investor, looking for steady returns.

Here are some of the advantages of a debt fund investment:

  • Stable Returns: Debt funds are less dependent on market sentiments. They are a safer option than equity mutual funds for investors with a low-risk appetite.

  • Low Risk: Debt Fund investments made in fixed-income securities that have fixed maturity periods and rates of interest and thus are more immune to market volatility.

  • Lowers Portfolio Risk: Debt funds could prove to be a hedge against the high risk of equity mutual funds. Allocation to the best debt mutual funds reduces risk and brings stability to an investment portfolio.

  • Liquidity: These funds are highly liquid and the funds are credited within the next business day, post redemption.

  • Tax-Efficiency: They are more tax efficient than bank FDs. Debt mutual funds are not taxed every year but only when the units are redeemed and would depend upon the tenure for which the units were held by the investor. The rate of taxation of capital gains of debt funds depends on the holding period.

Muthoot Finance is known not only for gold loans but also for its expertise in financial planning. Our financial experts guide you with the best mutual fund investments, as per your goals. Plan your visit to the nearest branch soon!

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