What Are Debt Funds And Who Should Invest In Them?

If you are a beginner investor, you must have come across the term ‘debt mutual funds’ while researching investment options.

Are you confused about the word ‘debt’? Well, don’t let the name deter you from investing in them. Once we explain how debt funds work, you will understand why they can be a rewarding investment. In this article, you will learn more about the benefits of debt funds and, most importantly, who should invest in debt funds. So, let’s dive right in!

Debt funds: Meaning

‘Debt funds’ are mutual fund (MF) schemes that invest in fixed income instruments that offer capital appreciation. These include corporate and government bonds, corporate debt securities, and money market instruments. This is one of the reasons why they are also called bond funds or income funds.

Let us now compare debt MFs to another popular category of mutual funds, called equity funds. Equity funds invest primarily in stocks. On the other hand, the underlying assets for debt funds are fixed income securities. This feature makes them much safer than equity mutual funds. How? When the market falls, the NAVs of equity funds plummet. In the case of debt MFs, the decrease is not as sharp. Thus, debt mutual funds safeguard your money against market volatility.

Now let us take a look at the other side of the coin, i.e. when the market shows a sharp increase. While the NAV of your equity fund units will rise considerably, it will not increase as much in the case of debt funds. Meaning, they offer moderate returns.

Let us now explore the benefits of debt funds in detail.

What are the benefits of debt funds?

Here are 7 reasons why you should consider investing in debt MFs:

1. They are low-risk options

Risk-averse investors should definitely go for debt or bond funds. Since they invest primarily in fixed-income securities with fixed maturity periods and rates of interest, they are protected against market volatility. Adding these funds to your portfolio with equity funds balances your risks and returns.

2. They yield stable returns

Debt mutual funds are less dependent on market conditions. So, they yield stable returns. True, they won’t rise as rapidly as equity funds in a bull market, but they won’t fall sharply in a bear market either.

3. They provide high liquidity

Debt or bond funds are easier to liquidate than other fixed-income investment instruments. For example, fixed deposits often have the constraint of a lock-in period. They also levy penalties on premature withdrawals. On the other hand, debt MFs do not have a lock-in period. Hence, they offer high liquidity.

4. They are suitable for short-term goals

If you have surplus money and you want to earn interest on it, go for debt or bond funds. They offer much higher interest rates than fixed deposits. With higher liquidity and higher returns, they have a dual benefit over fixed deposits!

5. They offer flexibility

You can either have a systematic investment plan (SIP) or make a lumpsum investment in a debt fund. Meaning that you have the flexibility to invest depending on your current financial capacity. You can also transfer units from one mutual fund scheme to another through STPs (systematic transfer plans).

6. They can be used as a source of regular income

Debt MFs allow you to withdraw a regular income. You can invest in the dividend option (IDCW) and earn dividends periodically. Or, you can choose to set up a systematic withdrawal plan (SWP). SWPs allow you to periodically withdraw a fixed amount of money by selling your mutual fund units as per your needs.

7. They are more tax-efficient than other fixed-income instruments

When you park your idle money in a fixed deposit, you need to pay taxes on the interest earned every year. But with debt MFs, your returns are taxed only when you redeem the units.

Who should invest in debt funds?

Debt MFs are low-risk. So, beginners are the ones who should invest in debt funds and make them a part of their portfolio before moving on to market-linked equity funds. In this way, they can earn steady returns without the anxiety of losing money due to a market crash. The same principle applies to conservative investors and risk-averse investors.

Additionally, debt mutual funds generate moderate but stable returns. So, if you want to grow your money for short-term goals or medium-term goals, it is better to park your money in debt MFs rather than fixed deposits.

Want to invest? Start here!

Do you think debt funds are the right fit for you? Time to look for suitable mutual fund schemes and make your money grow. Tata Capital’s Moneyfy app can help you get started.

Moneyfy is designed to help beginners invest conveniently and confidently. You can assess your risk profile and understand your mindset before investing your money. With our goal-based investment tools, you can decide the corpus you want to build over a certain time. Then, you can use our SIP calculator or lumpsum investment calculator to understand how much you need to invest to achieve your goal.

Once you have set your preferences, sit back, and relax! The app will recommend you India’s top-rated mutual funds tailored to your needs. You can then start investing and managing your portfolio from your smartphone.

Register on the app, complete the simple 3-step online KYC, and you will be investment-ready in a few days. So, download Tata Capital’s Moneyfy app today!