Debt funds help you invest with less risk and earn stable capital gains. Often, they are referred to as fixed-income funds as a significant portion of your money is invested in fixed-income securities such as treasury bills, government and corporate bonds, money market instruments, etc.
Investing money in such investment instruments lowers the risk of losses and ensures stable returns. But the amount or percentage of returns is something few investors know. This article can help you understand the returns on debt funds.
What is a debt fund?
Debt funds are a subcategory of mutual fund investments that invests in fixed-income securities such as bonds, treasury bills, gilt funds, monthly income plans, monthly income plans, and fixed-income plans. Debt funds also invest in short-term, medium-term, and long-term bonds.
In contrast to equity funds, debt funds are less volatile and are preferred by individuals with low-risk tolerance seeking medium capital appreciation. Despite lower volatility than equity funds, debt funds still carry a level of risk, and the returns are not guaranteed and depend on the risk of the underlying instruments.
Still, here are a few benefits of debt funds:
- High liquidity
Debt funds offer immense liquidity, unlike fixed deposits, where your amount is frozen until maturity. While they don’t have a lock-in period, some funds may have an exit load which is deducted at the source for early withdrawal. The exit period may vary from fund to fund. However, you can liquidate your funds on any business day.
- More stability
Investing in debt funds can diversify your overall portfolio and offer excellent investment stability. Equities are highly volatile, so investing in debt funds simultaneously can help mitigate risks and balance your portfolio.
Debt mutual funds also offer the movement of funds from one instrument to another through Systematic Transfer Plan (STP). Instead of investing a lump sum in equity funds, you can invest your money in parts depending on market suitability using the STP method.
- Tax benefits
Several individuals invest with the sole purpose of tax savings. Debt funds can be viable for them as they offer better tax savings than FDs.
How to invest in debt mutual funds?
You can invest in debt funds in two ways. You can either invest your money in a lump sum at once or choose a SIP (Systematic Investment Plan).
If you have a considerable sum at your disposal, you can choose the lump sum option and invest in one go. The SIP is suitable for investors who receive a regular salary and have monthly liabilities. They can invest every month in a debt fund of their choice using a fixed monthly amount at their ease.
Once they have chosen their investment mode, they can approach an AMC (Asset Management Company) online or offline and start investing in mutual funds. Several banks also offer mutual fund investment through their mobile banking app, which they can use to invest directly through their bank account.
Investors seeking stable and low-risk investments can invest in debt funds. These funds offer better liquidity and flexibility compared to equity funds. The returns on debt funds are low compared to equity funds and depend on the market performance. However, when you outline your investment objective and risk appetite, you can find the most suitable funds to invest in.