The investors in mutual funds are often torn between choosing to invest in debt funds and equity funds. While some prefer to invest in equities, the others opt for debt funds. In this write-up, we list down the benefits of investing in debt funds.
The debt funds, just like a mutual fund is an investment pool wherein the core holdings include fixed income investments. The main purpose of this type of mutual fund is to preserve the capital and generate valuable revenue for the investors. The fund managers typically invest the funds in various investment tools such as bonds and money market funds; the investment can be either for a short-term or long-term based on the financial goals of the individuals.
For a long time, most of the investors had this wrong notion that only investing in equities requires an in-depth understanding and analysis of the market condition. However, today, people have realized that research is the key to investing in debt funds and that studying the market well is mandatory to deal with the current micro and macroeconomic conditions of the market.
The modern day investors, within the debt industry have a plethora of choices to invest in the various investment instruments. You can make your selection based on the four broad categories – short term debt funds, long-term bond funds, ultra-short funds and monthly income plans. Be clear and precise with your personal financial goals while choosing the best investment plan.
Although investing in debt funds offer valuable returns, not many people know about the various benefits of these funds. One of the key advantages of investing in debts is that these funds are liquid, which implies that you can choose to withdraw your money at your discretion. Another significant benefit is that unlike the bank fixed deposits, premature withdrawal of the money from the debt funds does not require you to pay any premature withdrawal fees.
One of the underlying features that most investors look for in an investment tool is its tax efficiency, and debt funds are extremely tax efficient. The income earned from the debt funds after a period of 12 months is treated as long-term capital gain and is taxed at 10% after indexation. Investors get double benefits of indexation as it lowers their overall tax liability. In indexation, the cost of the investment is raised to negate the inflation rate for the investment period. Thus the longer you hold the investment, higher will be the tax indexation. Also, you need to know that the debt funds do not have any TDS (tax deducted at source).
If you have invested in an open-ended debt mutual fund scheme, based on the existing market condition, you allow your money to grow every day. Thus, putting your hard-earned money in these funds can give you higher returns as compared to investing in the savings account or the bank fixed deposits. As compared to the bank fixed deposits, the debt funds offer great flexibility to the investors; you can invest a small amount every month through the SIPs (Systematic Investment Plan) or anytime when you have surplus cash. Also, you can start an SWP (Systematic Withdrawal Plan), which allows you to withdraw a predetermined sum every month from your investment. These plans are beneficial for the retired and senior citizens wanting a fixed income every month.