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What is Debt Mutual Fund?

Debt funds invest in securities that generate income. Examples of such securities are: corporate bonds, government securities, commercial paper, treasury bills etc. The dual objectives of investing in a debt fund are to achieve capital appreciation and also earn interest income. The interest rate that you will earn along with the maturity period are pre-decided by the issuer.

Types of debt funds

Benefits of investing in debt funds

Here are some of the benefits of investing in debt fund schemes:

  • High liquidity

    Unlike fixed deposits, fund houses don’t levy penalties for redeeming your units soon. However certain funds may have an exit load if units are redeemed within three to six months. Debt funds are highly liquid.

  • Tax efficient

    Debt funds end up being far more tax efficient than fixed deposits. The longer one holds a debt fund, the greater is the indexation benefit. The tax is deferred until an investor redeems his units.

  • Debt fund returns could be attractive

    The pre tax returns offered by debt fund schemes are similar to the ones offered by other debt instruments such as fixed deposits and bonds. Short term debt funds are aligned with existing returns delivered by fixed deposit rates. They aren’t influenced by changes in interest rates. However, debt funds which invest in long term bonds move in an inverse direction to interest rates. Therefore if the latter declines, then the value of bonds shoots up and offers capital gains to investors.

How to invest in Debt Mutual Funds?

It is preferable to invest a lumpsum in debt mutual funds investments unless you are exploring gilt an income funds which are comparatively volatile.