Four benefits of investing in debt mutual funds

A debt fund is a mutual fund which invests mostly in fixed income instruments like government securities, corporate bonds or treasury bills. These instruments give you a fixed rate of return at the end of a fixed period. In essence you are giving the bond issuer a loan, which it promises to repay with interest. Here are four significant benefits of investing in debt mutual funds.

Here are four benefits of investing in debt funds

1. Stable returns:

   Debt funds are more likely to give a stable rate of return without dependence on market sentiments. So, if you have a low appetite for risk they offer a safer option. Or, if you want to plan for a specific financial goal within a certain timeframe, debt funds are your best bet.

2. Hedge against volatility:

   Debt funds can offer you a good hedge against the volatility of the equity market. The percentage of debt in your portfolio will depend on your financial plans and timelines, and your ability or willingness to take risk. This diversification helps stabilise your investment returns.

3. High liquidity:

   Debt funds can be liquidated easily and you can cash out of your investment much quickly than most other investment instruments, including fixed deposits that come with mandatory lock-in periods and attract penalty for premature withdrawal. ­So, if you think you might need extra funds in case of a medical or personal emergency or want to park extra funds for short duration, do consider debt funds.

4. Lower Fees:

   Debt funds have lower transaction fees compared to equity and other mutual funds. Unlike FDs, which are also low-risk investments that most investors consider, debt and other mutual fund schemes do not attract TDS. However, you will pay taxes based on the period of investment if you sell fund units. They generally offer better returns compared to fixed deposits or your savings account.

Risk factors:

It is important to remember however, that unlike bank deposits, debt MFs are not entirely free of risk. For instance, a change in interest rates could impact your investment. The corporate whose bond your fund may have invested in could collapse due to unforeseen reasons. Or they could be facing a liquidity crisis, which obviously puts your investment at risk. Over a longer term the returns on debt are likely to be far lower than the equity market, a debt fund therefore is good if you want to play safe and have a fixed financial objective and timeline in mind. Or if you have surplus funds in your savings account which could get more interest from debt.