InvestorQ : What are debt funds? Please suggest a good debt fund
Indrajeet Kashyap made post

What are debt funds? Please suggest a good debt fund

Swapnil Sarang answered.
4 years ago

Mutual funds that invest in fixed-income securities such as bonds, treasury bills, etc are called debt funds. There are many types of debt funds, such as:

- Gilt fund

- Monthly income plans (MIPs)

- Short-term plans (STPs)

- Liquid funds

- Fixed maturity plans (FMPs)

Debt funds are often considered “safe” investments and are best suited for cautious investors who are not comfortable with investing in the highly volatile equity market.

Debt funds provide investors with steady income. However, returns on debt instruments aren’t as impressive as the returns in equity funds, thereby proving the wisdom in the saying: High risk, high gain.

Debt funds can be classified in to two types based on when an investor can invest in it:

Open-ended debt mutual funds:In an openended mutual funds, the investor can buy or sell the fund at any time of investing. They are like equity funds, as they have easy entry or exit options. Debt funds that come under this category are: gilt funds, income funds, and other short-term funds.

Close-ended debt mutual funds:In close ended funds, investors can only invest when the issuer announces a new fund offer (NFO) of the scheme. Once the NFO is over, the debt mutual fund closes for investment. The fund matures after a predefined period, and the investor cannot exit like open-ended schemes. An investor can only exit the fund if it gets listed on the stock exchange. Benefits of debt mutual funds:

Taxation benefits: The taxation benefits in debt mutual funds are that there is no tax levied on the dividend. If debt mutual funds run more than three years, they are termed as long-term funds and are taxed at 20% after indexation. Indexation takes inflation into account, and the capital gains are reduced. TDS is not deducted from these gains. In the modified tax rules, the tenure of holding a long-term fund has been increased to three years. Low level of risk: If you are an investor with low-risk appetite then you can invest liberally in debt mutual funds. While they may not have high returns like equity funds, they are safer investment options as the risk associated with them is significantly low. Investing is easy:

Investing in a debt funds is actually quite easy. You can invest in debt funds through the Systematic Investment Plan (SIP) method where you have to invest a certain amount every month in the debt mutual fund, just like with other SIPs.

Advantage of Systematic Transfer Plan (STP): This is a way of investing in relatively riskier assets while keeping your capital safe. If you have a large corpus to invest, then you can invest in debt funds and transfer the amounts through the method of Systematic Transfer Plan wherein the amount is transferred to your choice of equity funds. Thus, as you can see, a debt fund is a suitable investment for investors who are cautious, have a low-risk appetite and are looking for some steady income.

Good debt funds in the market:

- Aditya Birla Sun Life Medium Term Plan

- Reliance Credit Risk Fund

- Reliance Liquid-Treasury Plan(G)

- SBI Magnum Gilt Short Term

- Aditya Birla Sun Life Short Term Fund

- HDFC Short Term Opportunities Fund

- ICICI Pru Flexible Income Plan

You can refer to the below table to choose between numerous debt funds: