What Are Debt-Based Funds? How Are They Beneficial?

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Invest Debt Based Funds

Are you new to mutual funds? You can gain a better understanding on what are mutual funds from this page. When you learn about mutual funds from this page, you will also see that there are different types of mutual funds. One such type is debt-based fund. Here, we will gain an understanding of how this type of mutual fund can be beneficial. But, before that let us throw some light on what are debt-based mutual funds:

What are Debt-Based Funds?

A debt based mutual fund is a type of mutual fund investment that focuses mainly on fixed-income instruments. When you invest in this type of mutual fund, your money will be invested in treasury bills, corporate bonds of government securities. At the end of a fixed period, you will get a fixed rate of return when you invest in this type of mutual fund.

Who Should Invest in Debt based Mutual Funds?

Now, you know what debt-based mutual funds are. But, before investing, you will be interested in knowing whether investing in this type of mutual fund will suit you. Let us find out here:

Debt mutual funds are the best option for investors interested in taking moderate risks. In general, mutual fund investment, as you know, is subject to market risks. Nevertheless, as compared to equity mutual funds, debt mutual funds carry less risk. So, you can choose this type if you have a lower appetite for risk. 

Even, this fund suits prospective investors with surplus funds. If you are looking for ways to diversify your investment portfolio, you can choose to invest in these funds. Let us consider that you have a higher equity allocation in your portfolio. In this case, you can bring down the overall risk in your portfolio by investing in debt based fund. The reason is that the debt element can support any downside risk of returns.

How Do Debt Funds Work?

As compared to low-rated securities, debt funds that invest in higher-rated securities are less volatile. Moreover, maturity also relies on the investment strategy of the fund manager. It also relies on the overall rate of interest followed based on the economy. When the fund manager sees a fall in the interest rate regime, he will invest in long-term securities. On the other hand, when he sees an increase in the interest rate regime, he will invest in short-term securities.

Are you still thinking about whether or not to invest in debt-based funds? Then, you should understand the benefits of these funds:

Benefits of Debt-Based Fund-

Better and Greater Liquidity:

Are you looking to invest in a platform with better liquidity? Then, choosing debt-based funds can be the best choice for you. When you do this, as an investor, you will get the option to withdraw your investment in these funds. Above all, the investments that you withdraw from these funds will quickly reflect in your bank account. It will happen within a day. So, you can compare investing in these funds similar to investing in fixed income arenas. But, here, you will not have to get through the huge paper works and penalties. 

Stable Returns:

As an investor, you know one thing for sure. You know that some investments including investment in equity mutual funds will help you get returns only on the basis of market trends. But, the good thing about debt based funds is that their returns do not rely on market sentiments. So, investing in these funds is a safer move if you have a low-risk appetite. Also, debt funds are the best choice if you have some financial goals to be met within a specific period. 

Tax Efficiency: 

It is true that short-term and long-term capital gains taxes are applicable on debt-based funds. But, when you invest in these funds for more than three years, the benefit of indexation will increase after three years. Also, the indexation benefit will increase with each year passing after three years. Further, debt-based funds are not affected by TDS. 

On the other hand, alternative investment options like fixed deposits have a direct deduction of 10.3%. This will happen when your interest income from fixed deposits exceeds Rs.10,000 in a financial year. Income from fixed deposits is taxed every year right from the year of deposit. Nevertheless, you can access the total money earned only when the plan matures. All these hindrances can be eliminated when you invest in debt-based fund.

Stability:

When you invest in debt funds, there will be an increase in the balance in your portfolio. When you take the case of equity funds, they might have higher return potential. Nevertheless, they are volatile. The reason is that the returns from equity funds are associated directly with the market performance. You can considerably diversify your portfolio and can reduce risk in your portfolio by investing in debt funds. 

Flexibility:

You might have different investments in your portfolio. But, the good thing about having debt funds is that you can get the flexibility. You can choose to invest in these funds through SIP. It means that you can invest whenever you get some additional income. Also, you can set a systematic withdrawal plan to easily withdraw the money from your debt fund whenever you need money.

Conclusion:

In short, investment in debt funds is beneficial in many ways. This investment is better than equity funds and even regular fixed deposits in many ways. So, buckle up to ensure an investment area with comparatively lower risk by choosing debt funds.