A debt fund is like the mutual fund in which the core holdings are said to be fixed regular income. The initial investment of debt funds is long-term or short-term bonds, money market instrument, securitized products, floating rate debt. Investing debt fund can be beneficial for future; however, there are certain things you should be aware of so that you can avoid the occasional bumps of the market.
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Tax-Free
Most of the investors look for an investment that would give them tax benefits and debt funds precisely provides the same. The dividend received on debt fund is tax-free. The debt funds invested tor more than three years are considered as a long-term investment and hence subjected to 20% after indexation. The inflation is considered in indexation which reduces the tax on capital gain. However, TDS is not deducted from the capital gain.
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Low risk
For those who do not have a high-risk appetite, debt fund is the best choice. The returns on the debt funds are not as high as equity fund yet it has a low-risk factor. The investor is assured with no loss. The only risk factor involves is when the interest rates are hiked. One must note that the bond prices and interest rates are inversely proportional and its effect is reflected in the debt fund’s prices.
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Invest through SIPs
The investors who are willing to invest a large sum should go for debt fund through a systematic investment plan. The SIP will allow the investors to select the fund of their choice. As it is a regular investment, every month a certain amount will be transferred to the equity scheme from the investor’s account. Debt fund through SIP is quite useful to the people who are of retirement age. They can enjoy the monthly gain, and the debt fund can be attained through a systematic withdrawal plan.
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The exit load
The debt fund is liquid so you can withdraw your money anytime you wish. However, some funds charge a penalty for exiting the fund before the minimum period. This penalty rate varies from 0.5% to 0.2% and the minimum period from six months to two years. 1% of exit load can cause a significant reduction in your gains hence it is advised that one should check the exit load before investing.
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Types of funds
The debt funds are divided by duration required for the sell and purchase.
Open end- It is like equity where you can purchase or sell the fund throughout the year. Short-term funds, gilt funds are the prime examples.
Closed-end- In closed funds, you can only invest during the NFO of the product. This scheme is not liquid as it takes time for the scheme to get mature.
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Dividends
Debt fund investor has the liberty to choose the dividend albeit they are not guaranteed.
Debt mutual fund is an excellent source of investment however one should consider these points before investing. It has superior returns in the future with low risks involved which is perfect for anyone who wishes to have steady investment.