Everything You Need To Know About Debt Mutual Funds

What Is A Debt Mutual Fund?

• A debt mutual fund invests a considerable portion of your money in fixed-income securities like government securities, debentures, corporate bonds and other money-market instruments.
• Since the interest rate regime in the economy and its movements can only affect debt funds, they are not directly impacted by the stock market volatility.
• Also, long term capital gains on investment in debt mutual funds held for more than 36 months come with the benefit of *indexation that helps you save tax on debt mutual fund withdrawal.

*Indexation is the method by which purchase price of an investment is adjusted for inflation.

Types Of Debt Funds

• Liquid Funds

A type of debt mutual fund which invests in debt instruments with a maturity period of not more than 91 days. These funds are considered to be among the least risky within mutual funds.

• Short / Medium / Long Term funds

Short-term debt funds are much affected by the change in interest-rate movements and they come with a maturity period of 1–3 years.

Medium-term funds come with a maturity period of 3–5 years and long term funds carry a maturity beyond 5 years and these both are relatively riskier than short-term funds. Always remember: The longer the tenure of a fund, the bigger the impact of interest rates on the portfolio.

• Dynamic Bond Funds

These funds come with a fluctuating maturity period as the fund manager will invest in instruments that have shorter (1–3 years) as well as longer (3–5 years) maturities. Why you ask? Because the fund manager will change the maturity of the portfolio based on the forecast on interest rates. These funds carry a little bit more risk than short-term debt funds.

• Corporate Bond Funds

This is an open-ended debt scheme which invests at least 80% of its total assets in highest-rated corporate bonds. These funds carry a relatively low amount of risk as they invest in high-rated instruments.

• Fixed Maturity Plans (FMPs)

FMPs come with a lock-in period and the period depends on the scheme you choose. Once you’ve made the investment in an FMP during the initial offer period, you cannot make additional investments in the scheme. Even though it sounds like a lot like FD, FMPs have two major differences — 1) They don’t promise fixed returns; 2) They are very much more tax-efficient than FDs.

Is Debt Fund The Ideal Choice For You?

• If you have a low-risk appetite, then debt mutual funds could be a good option for you.
• If your portfolio already has a lot of equity mutual funds, then you could choose debt mutual funds to bring diversification and reduce your overall portfolio risk.

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