5 quick facts to understand about debt mutual funds

Understanding the various securities present in the market today can be a bit overwhelming. For newcomers, understanding the various kinds of investments, schemes, plans, offers and calculations can instantly put them in a fix. This might even lead them to not invest at all because of the complexities. However, this article tries to simplify the answer to ‘what are debt mutual funds?’ –

  1. Fixed Income: A debt fund instrument is security which will generate a fixed amount of interest on your investment. It is basically lending money to an entity and in return, receiving a fixed amount of interest, which is pre-decided. Its maturity period is also decided before you lend money. The securities that are included in this category are government securities, corporate bonds, commercial paper, treasury bills, etc.
  2. Surety of Returns: How will you know if you will ever receive your money back? Well, for that, the credit rating of the security comes into play. You can find out the risk of default and disbursement of the money from the credit ratings of the security. It is the job of the fund manager of the debt fund to make sure that he has invested in high rated securities so that there is the least chance of default.
  3. Risk: Well, there is risk involved in debt fund investments from two ends; firstly, the fund manager has a chance of allocating the investment to low-credited security, which will mean more chances of default of payment at the time of maturity and secondly, an increase in interest rates can lead to a fall in bond prices, which will again impact the investor. The NAV tends to fall when interest rates are higher. So, falling interest rates are a regime in debt funds.
  4. Tax: The gains you earn from debt funds are taxable, unlike those you earn from ELSS. However, the rate of taxation is based on the period till which you stay invested in the funds. The rate of tax depends on the income tax slab. There are two categories where you can fall in this context; Short-Term Capital Gains of upto 3 years of investment and Long-Term Capital Gains of investment of 3 years and above.
  5. Liquid Funds: With a maturity period of upto 91 days, this is the perfect short-term debt fund, which is almost risk-free because of the short period. Even risks need some time to occur, so these funds have seen the least chances of negative returns. They can be a viable alternative to savings accounts since they yield higher returns.

These are 5 quick facts that will help you understand debt funds. There are many types of mutual funds in India that provide debt fund instruments to invest in. After knowing these quick facts about debt mutual funds, you will be able to invest in one without any hassle or confusion. Keeping in mind the above mentioned points will help simplify the process and ascertain if debt funds are actually meant for you!

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