Debt funds explained: You should take debt funds into consideration if your financial aim is to invest in fixed income instruments. But first, let's clarify what debt funds are, their different varieties, and the advantages of investing in them.
Debt funds are investment schemes that hold fixed income products such as money market instruments, corporate debt securities, and corporate/government bonds. Depending on the plan, the portfolio may include all of these securities or a combination of them.
Debt funds provide investors a variety of alternatives depending on their investment horizon and risk tolerance. Overnight/liquid funds are appropriate for investments with a duration of one day to three months. According to an ET study, short-term funds or corporate bond funds are suitable for periods of one to three years, and ultra short-term funds are best suited for periods of three months to a year.
Long-term employment Gsec funds are designed to profit from changes in interest rates and have maturities longer than three years. Target maturity funds are an option for those looking for steady returns.
A debt scheme makes money in two main ways: first, it makes accrual revenue by paying interest on the bonds it owns. Second, changes in interest rates result in an increase or decrease in bond values, which can provide capital gains or losses. These two kinds of gains add up to the investor's total return. Another name for the component that indicates capital gains or losses is the mark-to-market (MTM) return.
High liquidity is provided by debt funds, which enable redemptions made before the cutoff time to appear in the bank account the following business day. Unlike fixed deposits, which may have penalties for early withdrawal, investors are free to move between schemes as needed.
Unlike other fixed income products, debt funds provide the chance for capital appreciation during periods of declining interest rates.
Starting on April 1, 2023, debt mutual fund taxes will be in line with fixed income products. The income tax bracket of the person determines how capital gains from these schemes are taxed, without any benefits of indexation or long-term gains.
