Mutual fund is one investment vehicle, where retail investor relies on. Reliance on the asset class is assisted with reasons like professional management, lesser risk amid functional characteristics’ of diversification.
Debt fund is a form of mutual fund, where investor’s pool in money to be invested in debt market and debt market securities like, bonds and treasury bills.
Debt funds are preferred by risk averse investors. Investors who want steady income and wish to stay away from whirlwind of the volatile equity market, Debt funds are the answer to their investment query.
Factors like, almost negligible risk makes it a favoured investment option. Only risk associated with debt fund is the interest rate hikes. Prices of bonds are inversely related to interest rate. A spike in interest tends to put pressure on bond prices. However chances of this are very low.
The second reason being tax advantage. Any one investing in debt fund for more than 3 years is taxed at 20% after indexation. Indexation means, it even takes into account the effect of inflation, thus reducing taxes on capital gain .There are no TDS at the gains. However for the return earned in short term are included in individual’s income and taxed as per tax slab. So investing for long term is definitely wise in terms of return and taxation.
Any class of investor can invest into debt fund, as minimum required amount to invest is Rs1000, thus making it affordable even for student. This feature of mutual fund is covers all type of funds, thus making it one favoured investment class among the retailers.
Debt mutual fund investor also has an option to choose the option of dividend, however these are not guaranteed.
Some of the investment options in debt market are Gilt fund, monthly income plans (MIPs), Short term plans (STPs), liquid funds, and fixed maturity plans (FMPs). Apart from above given name debt funds can also be classified with respect to time period horizon like, short term, medium term and long term bonds. Debt fund can also be classified with respect to risk associated with them. To list few as per the risk, arranged in order of lowest to highest risk, to name, liquid fund, Ultra Short term fund, fixed maturity fund, shirt term and dynamic bond.
One must understand the lesser the risk, the lesser is the return. Higher return is attributed to higher risk; as an investor is compensated for putting his hard earn money at risk.
So in terms of return, Debt fund does lag behind, is it long term debt fund, or any other fund under the category of debt. Looking at the return in an average, in past one year long term debt fund has given an average return of 5.5%, long term firm stands second with 4.2% return, ultra short term fund also has a return percentage of about 6.3%. On an average return from various debt fund ranges from 4%-6.5%. Comparing it with Equity fund, return from debt fund will looks minuscule, as in past year, large cap equity funds have given return of almost 12%.Equity index fund return is also recorded in double digit at 11%.
So, investor while investing debt fund must keep three points in mind, one being low risk not zero risk, second being low risk cumulates to low return. Last but definitely the most important one, investments in these funds are subject to market risk, thus do your homework carefully before investing.