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- Benefits of debt funds
When it comes to your money, what makes you sleep peacefully at night? Perhaps, the knowledge that is invested right with relatively fewer risks? Debt mutual funds may help you get that feeling. Ideal for investors with a lower risk appetite, not friends with the stock market volatility, a good entry-point for new investors and yet, aiming to give you relatively better returns than the traditional investment instruments; that is debt fund investment for you! Once you start exploring, you will find that the benefits of debt funds are plenty.
You can read here to know in detail about how debt funds work. Whether you want to invest for a long-term goal or a short-term one, there is a debt fund for everyone. Short term debt funds are, in fact, quite popular, owing to liquidity and other advantages.
Here are a few of the many reasons why debt fund investment should be considered.
High on Liquidity
Debt funds generally don’t come with a lock-in that prevents you from redeeming them. This is another reason that short term debt funds are popular because the investor feels comfortable knowing that the money is accessible. It is easier to redeem a debt fund and it can be done with a few clicks of your mouse.
Relatively Stable and Safe
When you read more about how debt funds work, you will realise that it is all about lending to the Corporates/Government. So long as you are mindful of where the fund invests in, and if that aligns with your risk appetite and investment horizon, you may not have to worry about your investment. Bond markets are less prone to volatility as compared to equity markets, and hence, are relatively stable.
Tax Efficiency
Debt mutual funds tax benefits may just be the biggest incentives for you to be investing in them. Let’s see how debt funds can generate tax-efficient returns
STCG Tax (Short Term Capital Gains Tax)- If your holding period is less than or equal to 36 months, then STCG tax is applicable on your capital gain/returns when you redeem your investment. In this case, the capital gain is taxed as per your income tax slab rates.
LTCG Tax (Long Term Capital Gains Tax)- If your holding period is more than 36 months, then LTCG tax @ 20% (with indexation) is applicable on your capital gain/returns when you redeem your investment. The indexation benefit in debt mutual funds helps you to consider the inflation. It does so by calculating the capital gain with respect to the indexed value of the investment rather than with the original purchase value. The cost of inflation index (CII) is used to calculate the indexed value. For example, if your original investment amount was Rs 100, which became Rs 150 at the time of redemption, and the indexed value of your investment is coming to Rs 125, the capital gain will be Rs 25 (150-125) and not Rs 50 (150-100).
Risk Reduction by Diversification
For any equity-heavy portfolio, debt funds lower the portfolio risk by adding diversification to your portfolio. Of course, your debt fund returns must complement your portfolio returns and also your financial goals, and that will need strategic investing. But when it comes to debt funds vs equity funds, the former is relatively more stable, more liquid and has a lower risk. Although, one should note that debt funds are not absolutely risk-free. You can read more about the risks associated with debt funds, 
Aim for Better Returns than Traditional Investment Instruments
Debt funds have the potential to generate relatively better returns than traditional investment instruments. The funds may benefit from falling interest rates, which may help in capital appreciation
Now that you have learnt about the benefits of debt funds, let us find out if they can align with your financial goals. to find out who should invest in a debt fund
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their associates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully
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