When it comes to investment, most of us are often confused. Sometimes without delving deep we readily accept the proposals or investment scheme suggested by our agents or financial planners ignoring its long term effects. It’s only after a few years we realize whether the investment idea was right or wrong. But by then it would be late.
Honestly speaking, not any investment is bad or good per se. However, it’s extremely essential that every prudent investor should thoroughly get aware about the specialized terminology used in stock market.
We often come across the phrase that “don’t lay all your eggs in the same basket,” the actual connotation of the couplet means that every investment strategy should be followed with right mixture of equity and debt. But many a time, investors get lured by the sheer attraction of profit and ROI (Return on Investment) prompting them to make huge investment in highly volatile equity market with no guarantee of capital safety.
What are debt funds?
Debt Mutual Funds or simply Debt funds refer to a category of mutual funds that are invested in fixed income securities like bonds and treasury bills helping people to earn a fixed rate of return and interest after a certain period of time. It includes several short, medium and long term bonds for investment purposes.
It is highly suitable for middle income investors who want safety of their capital with an option to make withdrawal as per need. No doubt, income earned from debt funds is lesser as compared to equity investment, but there is a certainty of income and capital which otherwise doesn’t exist in share market. You can go for investing in MIPs (Monthly Income Plans), Fixed Maturity Plans (FMPs) and short-term funds to start with investing in debt funds.
Buying debt funds is definitely good for your investment portfolio. It is a universal truth that share market crash can happen any day resulting in complete fall down in the value of share capital you hold. There isn’t any other way of keeping your capital secured as long as you invest in highly fluctuating equities only. Debt funds can keep you safe from market volatility – acting as your savior and offering you timely returns and interest. Most of the debt funds are open-ended and can be redeemed any time as per your wish. However, some close-ended debt funds are also available in which you can’t redeem it before a certain lock-in period say 2-3 years.
Key Advantages of Investing in Debt Funds
- Liquidity: Many investors think that FDs are more liquid than Mutual Funds which isn’t true. You can withdraw your investment in debt fund after a month or two depending upon your need without paying any penalty. But pre-matured FD withdrawal always deducts some amount of interests as penalty. The option of partial withdrawals from debt payment is also available but you can’t liquidate your FD partially.
- Less Paperwork: Making investment in debt funds is comparatively less difficult than investing in banks schemes such as the Fixed Deposits or Recurring Deposits. You can simply log on to your online demat account and easily invest in debt funds at a single click. In case of FDs, you have to visit your nearest bank branch to open your new FD account.
- Higher Returns: Long term debt bonds pay much higher rate of interest than Banks FDs or other schemes. It is always a profitable financial venture to invest in long term debt funds than in equities or FDs.
- Tax Free: In Bank FDs, taxation is levied upon the accrual interest every year even if it will mature after 4-5 years, but there is no taxation in debt funds until the investor encashes the entire amount of his investment cap.