What is Debt Fund Types Benefits and Advantages
Mr Shyam wants to invest in generating good returns, but he is wary of price fluctuations for his investments. So, his friend advises him to invest in debt mutual funds, as they have low risks and generate steady returns. That will help Mr Shyam to grow his wealth as well as get returns on the investment. Corporate bonds, government securities, commercial paper, and treasury bills are instruments where the debt mutual fund invests the money it collects.
Types of Debt Funds
- Liquid Funds
In liquid funds, the money is invested in debt instruments with a maturity period of fewer than 91 days. Liquid funds have seen negative returns on rare occasions, so this investment is considered low-risk for the investor. Liquid funds are the best option for investors who temporarily park their cash surplus for several days.
- Overnight Funds
Overnight funds have the least maturity period of just one day. The overnight funds aim towards providing liquidity and convenience over higher returns. These funds are convenient for investors who want to park funds for a brief period.
- Ultra-Short-Term Funds
Ultra-short-term funds have a maturity period of 3 months. This fund earns slightly more yield than liquid funds and has a low risk of investment. Some ultra-short-term funds invest in bonds with low rates to increase the yields.
- Short-Term Funds
Short-term funds have a maturity period ranging from 1 to 3 years. As a result, short-term funds have a higher return compared to ultra-short-term and liquid funds. Therefore, investment in short term debt mutual funds may be beneficial for conservative investors. In addition, the returns on these funds are not affected much by the fluctuations in interest rates.
- Medium and Long-Term Funds
The duration in which the medium-term debt mutual funds invest in debt instruments is between three to five years maturity. On the other hand, the long-term funds invest in instruments that are more than five years in terms of their maturity. These funds primarily invest in the debt securities of government, private sector and public sector companies. These funds do well when the interest rates are low. However, these debt funds underperform in case interest rates are rising.
- Gilt Funds
Gilt funds invest particularly in government securities only. It gives high-rated securities and low credit risk on investment. Gilt funds are for investors looking for risk-averse investors, as the government rarely defaults on the loan taken in the form of debt instruments.
Benefits and Advantages
i. Tax Efficiency
You may want to invest for the primary reason of reducing the annual income tax payment. Tax planning is one of the benefits which investors get in debt mutual funds. Traditional investment options like Fixed Deposits (FDs) are less tax-efficient when compared to debt funds.
ii. Stability of Returns
Debt funds are capable of providing capital appreciation over time to the investor. Debt funds come with a lower degree of risks than equity funds.
iii. Portfolio Balance
If you choose to invest in equity funds, it has higher returns potential, but the returns are highly volatile. That happens because the returns in the equity mutual fund are dependent on how the stock market performs. On the other hand, the portfolio can be adequately diversified in debt funds, and the risk is lower.
iv. Money Flexibility
With the help of a Systematic Transfer Plan (STP), you can move your money to different funds from debt funds. Investors can invest a lump-sum amount in the debt fund and transfer a small portion of the money into equity mutual funds at regular intervals. That would help you manage your investment in equity mutual funds while your investment in the debt mutual fund continues to earn you returns more than the usual bank deposit or even the fixed deposit.
So, if you are looking for stable returns and relatively lower risk, investment in debt mutual funds is a good option for you. You can choose a debt mutual fund that fits your need.
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