A debt funds is to consider them basically as a method for going through the interest income that they get from the bonds they put resources into. It is an investment pool, like Mutual Funds or Exchange Traded Funds (ETF), in which the center possessions are the fixed income instruments like Treasury Bills, Government Securities, and Corporate Bonds. Debt funds are perfect ventures for financial specialists who are very conservative in terms of taking risks. Debt fund can be open ended or close ended according to the fund. A Debt fund is more secure then equity fund as it have less variance.
Purchasing a debt instrument is like giving a loan to the issuing element. The interest that you earn on these debt securities is pre-decided alongside the time after which the debt security will mature. Debt funds invest into various securities in light of their credit ratings. The fund director of a debt fund support guarantees that he invests into high credit quality instruments.
A higher credit rating implies to pay interest on the debt security regularly as well as pay back the principal amount upon maturity. This is the reason why debt funds invest into higher-appraised securities will be less volatile as compared with low-rated securities.
They are reasonable for both the short-term and medium-term investment horizons. Short term and begins from 3 months to 1 year. Medium term is from 3 years to 5 years. For a short-term investor, debt funds are like liquid funds might be a perfect venture as compared to keeping your money in a saving bank account. Liquid funds offer higher returns in the scope of 7%-9% alongside comparative sort of liquidity for meeting crisis necessities.
a. Dynamic Bond Funds
b. Income Funds
c. Short-Term and Ultra Short-Term Debt Funds
d. Liquid Funds
e. Gilt Funds
f. Credit Opportunities Funds
g. Fixed Maturity Plans
a. Risk: It is less risky.
b. Return: The Net Asset Value (NAV) of a debt fund tends to fall with a rise in the overall interest rates in the economy. Your fund manager gives him/her best to give you a excellent returns.
c. Cost: Debt funds charge a fee to manage your money called an expense ratio.
d. Investment Horizon: If you have a short-term horizon of 3 months to 1 year, you may go for liquid funds. Conversely, short-term bond funds can be considered for a tenure of 2 to 3 years. In case of an intermediate horizon of 3 to 5 years, dynamic bond funds would be appropriate. Basically, the longer the horizon, the better the returns.
e. Financial Goals: You can use debt funds as an alternate source of income to supplement your income from salary. Budding investors can invest some portion in debt funds for purpose of liquidity. Retirees may invest the bulk of retirement benefits in a debt fund to receive the pension.
f. Tax on Gains: The rate of taxation is based on how long you stay invested in a debt fund called as the holding period.
a) Capital appreciation in the Unit price, due to the market value increase in the investments of the fund.
b) Dividend from debt mutual funds.
b) Change in market conditions leading to capital appreciation or depreciation of various securities in the portfolio.
Let’s learn its 10 salient features which makes debt funds a good investment opportunity for investors.
- LOW RISK FACTOR
- TAX EFFICIENT
- TYPES OF DEBT FUNDS
- TYPES OF DEBT FUNDS BASED ON RISKS
- MODIFIED TAX RULES
- MARKET LINKED RETURNS
- INVEST IN SIPs THROUGH DEBT FUND
- INVESTMENT TRANSPARENCY
- EXIT LOAD
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