Mutual funds that invest primarily in fixed-income equities and bonds, debt, T-bills, as well as other similar money market funds are referred to as debt funds or bond funds. Debt funds are another common name for these types of mutual funds. In comparison to equity funds, they provide more consistent returns and become less subject to market swings. Although debt funds often provide returns that are lower than those of equity funds, there are a number of compelling reasons to include debt funds in your investment portfolio.
1. Quick maturation time
Even while the majority of investments are undertaken with a long-term view in mind, there will always be instances when you find yourself in need of cash due to unforeseen circumstances. Due to the fact that they have such a short maturity horizon, debt funds are quite amenable to being liquefied in precarious times like these. Therefore, if you want to add some liquidity to your investment portfolio, one option you might explore is purchasing shares in a debt fund. In addition, the majority of such debt funds do not impose an exit load, which means that you will not be penalized for making early withdrawals from your investment.
2. High return
Because they are less sensitive to changes in market sentiment, debt funds are recognized for providing relatively consistent returns to investors. Debt funds are mutual funds that invest at least 65 percent of their corpus in debt instruments such as deposit accounts, debentures, bond papers, and other similar investments that are less susceptible to volatility than equities. Due to the fact that they are less susceptible to changes in the market, they may not produce as high of returns as equity investments, and they also do not collapse as quickly.
3. Tax benefits
The tax benefits that an investor receives are directly related to the amount of time that he or she holds onto a fund. If an investor keeps their holdings in a debt fund for less than a year, they may be subject to a tax on their short-term capital gains. On the other hand, debt funds that are held for more than a year will be subject to a long-term capital gains tax of 20%, which will include indexation advantages.
4. Low risk
The fact that debt funds put their investors’ cash at such a little risk is the major advantage of investing in them. Despite this, debt plans do not come without danger since they are subject to two categories of risk that are extremely different from one another and very real. When a fund manager makes investments in securities as well as instruments that have a poor credit score or rating, for instance, they are taking on credit risk, which exposes their investment to a high likelihood of defaulting on their payments. Also, a very real risk associated with debt funds is the interest risk, which states that a rise in interest rates would result in a significant decrease in the value of connected bonds.
5. A Higher Level of Liquidity
One of the advantages of investing in debt funds would be that it enables you to reap the benefits of a highly liquid investment, which is among the fund’s other features. You, as an investor, have the ability to make a withdrawal from your debt fund investment when you feel the need to do so, and the money will be sent back into your bank account within just one business day. When compared to other fixed-income vehicles, such as Fixed Deposits, which need a significant amount of paperwork and might result in fines, the discrepancy in liquidity is immediately obvious.
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Investors who are looking to minimize their risk while still achieving cash gains to satisfy their short-term objectives can consider investing in debt mutual funds. Investors should avoid putting all of their money into a single mutual fund and instead diversify their holdings by purchasing shares of other funds as well, as this is the prudent thing to do.