One of the most important rule of investing is that you should also have debt products in your investment basket along with equity products. If you have not yet invested in debt, this may be the right time to invest in debt funds looking at the peaking interest rates in the economy. [Read more about asset allocation]
Debt Funds are those funds which invest in debt instruments like government bonds and fixed deposits. The main objective of debt fund is capital preservation along with generation of income. The expense ratio on debt funds is much lower than equity funds because of the management costs are much lower vis-a-vis a equity fund. For investment in debt funds or equity funds, you need to be KYC Compliant.
Why You should invest in Debt Funds?
When interest rates fall, bonds prices increases and so is the case with debt mutual funds. The main reason to invest in debt funds is that you get capital appreciation rather than directly investing in bank deposit where the returns can be lower. Because when the interest rates start falling in the economy, the bond prices give you higher yield and thus high returns delivered by debt funds.
Another important benefit of investing in a debt fund is that you get regular income out of your investments. The current income from best mutual funds (debt) can be anywhere between 9% to 10%
Debt Funds are comparatively high liquid especially when we compare it with real estate investment. You can en-cash debt funds within 2 to 4 days of time. The amount received is based on the current NAV of the debt fund. Because of this feature of debt funds, many listed companies use debt funds for cash management purposes in their corporate activities.
If we compare debt funds with a fixed deposit on the point of tax implications, debt funds are much better. The short term capital gain earned from debt funds is added to the current income of the investor and taxed at applicable income tax rate slabs. In case of long term capital gains tax, the tax rates are 20% with indexation and 10% with indexation.
Adding to it, dividend earned from debt funds is tax free in the hands of the debt fund investor. AMC have to pay a Dividend Distribution Tax (DDT) of 14.16% to the government.
Also you might want to find out which color code would be given to Debt Mutual Funds.