3 Reasons Why You Should Invest in Debt Oriented Mutual Funds

by Shashank Bhaskar Finance Adviser

Mutual funds are one of the most preferred market investment instruments, for amateur and experienced investors alike. Investors can choose from a wide range of mutual funds such as fixed income funds, equity funds, index funds, specialty funds and debt funds. Of these debt funds are very popular and are further divided into different categories such as short, medium and long term funds, liquid funds, hybrid funds, dynamic bond funds, gilt funds etc. This is a mutual fund which predominantly invests in securities providing fixed incomes such as corporate bonds, government securities, deposit certificates and other such money market instruments. Here are 3 reasons why you should invest in this type of mutual fund.

Debt based funds are more liquid than a bank fixed deposit

One of the best qualifies of debt mutual funds is that it is very liquid. This simply means that you can withdraw the fund at any time and the funds are transferred into your savings account within 24 hours. Moreover, you do not have to pay any penalty for existing from this fund in a short period. You may be charged a small exit load only if you choose to redeem the investment before 1, 3, or 6 months. Also, unlike an FD that needs to be broken completely to redeem the funds, the debt based fund can be redeemed without breaking the entire investment. You can easily make partial withdrawals.

Returns earned on debt based funds can be quite high

The pre-tax returns you earn from a debt based fund are comparable with other investment options like bonds or fixed deposit. However, a good reason to invest in debt mutual funds is that this type of mutual fund has the potential to help you earn higher returns, especially if interest rates on FDs are changed or reduced. The highest interest you earn on FDs is typically 8% and the interest rate in the past few years has only declined. But whether you invest in short-term or long term debt-based funds, the interest rate has been steadily increasing, which means the return on investment is also higher as compared to fixed deposits.

Debt based funds are tax-efficient when compared to bank FDs

If you consider the long term, then debt based mutual fund are way more efficient as compared to fixed deposits. The income you earn after just one year of investment is considered as long-term capital gain and you pay a tax at either 10% or 20%, post indexation. Indexation is defined as the cost of investment, which is raised to consider inflation for the actual investment period. Your indexation benefit increases based on how long you stay invested. Also, unlike fixed deposits, where you are required to pay TDS on the interest earned if the interest income exceeds ₹10,000 per annum; there are no TDS charges levied for investing in debt oriented funds. Moreover, while you have to pay income tax on the interest earned on FDs, on an annual basis even if the FD matures after 5 years; taxes on debt based funds are deferred until you redeem all your mutual fund units.

Final word: Debt oriented mutual funds are ideal for conservative investors who don’t have high risk appetites but want to benefit from mutual fund investments. You can earn good fixed monthly income without having to undertake big risks. You can choose from different types of funds with different investment horizons, but ensure you utilise the services of a wealth manager who can guide you with your investments in a way that your financial goals are fulfilled.