Invest in debt funds for risk-free returns

Have you ever considered replacing conventional form of saving surplus amount in a fixed deposit with investment in debt mutual funds for better returns and tax benefits also? If your answer is no because you don’t have an in-depth knowledge of debt mutual funds, please read on.

Debt as the word suggests is loan. So, debt mutual fund is a fund which gives loan. This loan is given to the government, business organisations or financial institutions. The government borrows to fund or meet its day-to-day expenses, building roads, railways etc.

Whenever the expenses of the government are more than the revenue collected, then it needs to borrow so the government issues bonds and treasury bills. Business organisations borrow for expansion, so they issue corporate bonds and commercial papers. Financial institutions borrow for enhanced activity and for this they issue certificate of deposits or debentures.

Debt funds are a collection of fixed income securities. Debt mutual funds are further classified based on time horizon and risk-taking capacity of the investor.

Why should you invest in debt mutual funds?
In debt fund, a loan is given to multiple entities like government, corporates and financial institutions. Debt funds are invested in multiple securities and so they are diversified in nature. Debt fund is less risky because it is in the form of a loan, but it is subjected to interest rate risk and credit risk.

Credit risk is some sort of a loan going back but as these are a collection of securities so these have a less impact on overall portfolio. The fund managers ensure to invest in highly-rated securities.

If the current rate of interest goes down, securities that are already issued with high interest are in demand and vice versa. Debt funds are less risky when compared to equity investment. Debt funds are less volatile, so it yields predictable returns.

Debt mutual funds provide high liquidity as they can be redeemed in two days. If a debt fund is held for more than three years, then the return is taxed at 20 per cent but after indexation  debt fund is tax-efficient also.

If the investment duration is for three years, then it is advisable to invest in debt funds because it gives predictable returns with less risk.  If your risk profile is conservative and you can pump in money to reach your financial goals, then you should invest in debt funds.

If you have funds and don’t have any financial need immediately then you can park your deposits or finances in debt mutual. So, this is all about what a debt fund is and why you should invest in debt funds. (The author is a homemaker who dabbles in stock market investments in free time)