Though they offer lower returns than equity funds, debt mutual funds in India offer several advantages to low-risk investors seeking stability in their investment.
Debt funds are mutual funds in which your primary holdings are in fixed income instruments such as long term bonds, money market investments, floating rate debt instruments or securitised products. They generate returns by investing your money in different kinds of deposits and bonds. Thus, they lend money and earn interest on the lending. In this sense, they are slightly similar to other debt instruments like fixed deposits (but not quite, as the points below illustrate).
Contrary to equity funds, debt mutual funds in India offer a slower and lower rate of growth. However, they also offer more stability with less chance of fluctuation. Thus, they are ideal for low-risk, novice investors who wish to gain good returns without the added risk of market volatility.
Consider the benefits of investing in debt mutual funds in India instead of parking your money into fixed deposits:
* They offer more liquidity. Debt mutual funds are more liquid than FDs. You could be in sudden need of money, and choose to liquidate the debt fund. It is liquidated quite easily and the money reaches your bank account within 24 hours. Also, unlike the FD, the fund house does not penalise you for withdrawing the fund prematurely, with only a few fund houses levying an exit load for withdrawal within the 3- to 6-month window. Partial withdrawals are also allowed.
* They offer more tax benefits. Debt funds are more tax efficient than FDs, since there is no TDS charged on them. For an FD, there is 10.3% TDS charged on interest income higher than Rs 10,000 at deposit maturity. Meanwhile, the returns from the debt fund are treated as long term capital gains after one year of investment, and the fund is taxed at 10% or 20% after indexation. So, the longer you stay invested in the fund, the higher is the indexation benefit.
* The returns are higher. The debt fund yields higher returns if the interest rates change, which does not happen with FDs. Another advantage is that rate changes have little effect on short term debts funds. Long term debt funds appreciate when rates fall, which accrues good capital gains for you – they have shown an average 12% rise in the year 2017.
* They are more flexible. Another good advantage that debt funds show is their affordability and flexibility. You can invest in the fund using a monthly SIP, paying as little as Rs 500 per month. This cannot be done with an FD. Also, debt funds allow you to initiate an SWP where you can partially withdraw small sums against the fund every month, which helps you gain a regular income.
* There are several top debt funds from reputed fund houses. The best news is that the country’s leading fund houses offer the best pick of debt mutual funds in India. You can choose from up to 9 different schemes, with the option of seamlessly shifting to equity funds within the same fund house.