There has been a growing interest in the working of debt funds and with the recent disappointing results from the equity market, this engrossment has coupled. Many folks in the financial sector have put a keen interest on debt funds.
Well, it is true that most of the people are either misinformed or misled of the true nature of this kind of investment. Take a seat and relax because we would here be busting myths and empowering you to make the right decision for yourself. To avoid regretting later, familiarize yourself with the concept of debt fund and rest assured it would always come handy to you in your life.
Basically, debt funds work pretty much as a mutual fund wherein one invests in fixed income securities like government bonds, treasury bills, corporate bond, certificate of deposit, commercial paper, etc. They are generally favoured by those people who are not ready to put resources into a profoundly unstable market or a vulnerable state. As an investor looking forward to investing his hard-earned money, it is extremely imperative for him to know what all it offers.
Advantages of debt funds
1. Ensures greater flexibility
Debt funds offer the investors an array of choices right from a maturity time frame, which can be as less as 3 days or can even be 5 years. Money can be invested in a lump sum or systematic instalments, thus making it user-friendly. Not only this but the amount invested can also be transferred to any other scheme as per the desire of the investor, which is absent in other traditional investment platforms. All these simply proves how flexible debt funds can get.
2. Stable portfolio
In this kind of investment, the fund manager does not invest in high rated instruments which may prove to be riskier and unsafe. Unlike the tumultuous ride in various stock markets or equity markets, one can expect a stable interest over a period of time by investing in debt funds. This makes it one of the most secure investments in the individual’s entire investment portfolio.
3. Risk appetite
The best part about debt funds is that they are those funds which maintain balance with more stability when compared to all other investment options. The risk carrying capacity is neither too high like stock or equity markets and neither risk-free at all like fixed deposits.
4. Liquid in nature
One of its types, that is, liquid funds, has attracted investors due to its high degree of liquidity. This enables the investors to park their cash or even cash it out as and when required. No wonder, it is seen as an alternative investment to other traditional ones like fixed deposits where often a penalty is charged on premature withdrawal. This is often considered as an attractive feature by investors and leaves no stone unturned to exploit the opportunity.
5. Efficiency in tax
If your aim is to reduce the yearly tax outgo, debt funds can prove to be very beneficial. One becomes eligible for tax benefits only if he holds the investment for a period more than 3 years, wherein one has to pay taxes only on the returns which are above the inflation rate. This, thus makes it more tax efficient and provides an overall high return from a bird’s view.
6. Nominal transaction cost
Investors have to pay a nominal charge only once during the investment termed as transaction fees. However, for investments above the ceiling amount of Rs 10,000, no transaction fee is levied. Other than that, indirect basic costs may be levied annually because expertise and management skills are essential for fund management. In comparison to other investment options, it has a nominal charge which could be used to one’s own leverage.
7. Immune from market volatility
The equity market is extremely fluctuating, unpredictable and eventually might get riskier. However, debt funds are totally unaffected from these fluctuations and uncertainties and are considered a much safer investment. Such a type of investment adds a pinch of stability to one’s portfolio and the investor can expect stable returns than get lured with high returns and no stability.
Having said all these and learning the advantages of debt funds, one must be careful while putting any sum. A good example can be given of the series of defaults and downgrades that Dewan Housing Finance Corporation Ltd (DHFL) has faced for not investing the right way. However, this only depicts the after-effects of not doing thorough research and not choosing the right investment which suits the investor expectations and routine perfectly.
It also speaks volume about how there is merit in debt funds if chosen carefully. Many times, investors overreact when the market is in turmoil and simply shun down the debt funds. Nonetheless, if invested properly, debt funds can prove to be the best of its kinds. Always remember that the key is to know the facts, do thorough research, and act as per what would be the most suitable one for you than going with the mainstream.