Debt fund is just like a mutual fund, an investment pool in which core holdings are fixed income investments. It is likely to be able to invest in short-term or long-term bonds, securitised products, money market instruments or floating debt. This fund ‘s principal investment objective is usually capital preservation and income generation. Have a look at Touchstone Investments.
There are various debt investment instruments available on the market and investors should only invest in those funds that match their investment horizon and risk profile. Earlier there was a misconception that before investing, only Equity funds would require a thorough study. But the current micro- and macro-economic conditions also mandate the same for debt funds.
Currently, the industry has a number of debt investment instruments and there is a dire need to consolidate a number of them to make it easier for investors to understand. They can normally be selected under four major categories-short-term bond funds, long-term bond funds, monthly income plans and ultra-short-term funds.
Although it offers good rewards to invest in these funds, very few put their money into these investment options. One of the benefits of investing in these instruments is they’re liquid. You can withdraw your investment at any time, and the next day the money is in your bank account. Unlike a fixed deposit, what’s a respite here is that the fund house doesn’t charge a penalty for exiting too soon.
Another key advantage is that they are considered to be very good instruments which are tax-efficient. After one year of investment, a debt fund ‘s income is treated as a long-term capital gain and after indexation is taxed at either 10 per cent or 20 per cent. Investors get the benefits of double indexation. That diminishes their tax liability. In indexing, the investment costs are raised to account for inflation for the period of holding the investment. The longer you hold these funds, the greater is the benefit from indexation. There’s no TDS in those funds as well.
Third, you don’t lose even a day’s growth by investing in an open ended debt fund. Ploughing your hard-earned money can also yield good and higher returns. Pre-tax returns are similar to those from other debt options like fixed deposits and bonds. But if interest rate changes, your investment could yield higher returns.
The debt funds are also more flexible than fixed deposits (DPs). Every month one can invest small amounts through a systematic investment plan ( SIP), or whenever there is cash surplus. Similarly, one can initiate a systematic withdrawal plan (SWP) every month to withdraw a predetermined sum from his / her investment. This is very useful for pensioners who want a monthly fixed income. Also an investor can change the SWP amount whenever he / she wants.
Many investors wanting to stay away from equities have shown a keen interest in debt products in the form of reallocation or fresh buying. As a consequence, these low-risk and steady return funds have become highly popular among investors. As a smart investor, you should use proactive wisdom to choose the right debt fund that meets the horizon and objective of your investment.