When should you invest in it?
In times of volatile market scenario which we have seen for the past few years, investors often resort to the safest and risk free investment options like FDs, PPF etc. but hardly invest in debt funds. This is mainly due to the ignorance about debt funds in terms of its structure and where it invests. As a matter of fact when the interest rate falls in an economy, debt funds offer higher returns than FDs. Let’s understand it better:
What is a Debt fund?
Debt funds are a type of mutual fund schemes which invests in fixed income securities right from corporate or government bonds and treasury bills. Debt funds have different categories which invest for short term, long term and medium term bonds.
What are different types of debt mutual funds?
- Ultra Short Term (Liquid Plus): These funds invest in for a shorter maturity from a couple of days to a month and invest the money in commercial paper, treasury bills and certificate of deposits.
- Short-term Plan: Invest in fixed income securities or corporate instruments primarily where the maturity of instruments is short term in nature.
- Floating Rate Funds: These funds invest part of the proceeds in those securities which pays interest on a floating rate and the balance in fixed income bearing securities.
- Fixed Maturity Plans (FMPs): FMPs corpus is invested in fixed maturity corporate instruments. It comes with different maturity options ranging from one month to three years and these schemes mostly close-ended.
- Income/ Debt Fund: These schemes invest in corporate bonds, G-Secs mainly and are less risky as compared to equity schemes. These schemes do not get affected by market volatility of equity markets.
- Monthly Income Plans (MIPs): These schemes are popularly known as MIPs and it mainly invest in debt instruments and only 10-20% money is allocated to equity. But don’t go by the name of this scheme as it does not guarantee monthly income since the returns of these schemes are market linked.
Should you invest in debt funds?
The main objective of investing in debt funds is to protect your principal amount and generating decent returns alongside and to generate better returns than offered by other fixed returns instruments like FDs, PPF etc. So if you intend to invest for short-term period, then debt funds meets your requirement while if you want to invest for long-term then you can invest in multiple instruments and diversify your portfolio. Debt funds provide much stable returns than equities and prove to be a great investment option for investors seeking capital appreciation and tax benefits in terms of lower rates of taxation but more importantly safety of their capital. It is much better than fixed deposits if the capital protection is not the sole and primary concern, so select a debt fund scheme based on your time horizon and risk taking ability.