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What is a debt fund?

Debt funds are mutual funds which invest in fixed income securities such as bonds, money market instruments (treasury bills, government bonds, non-convertible debentures) or even a combination of the two.

A debt fund which invests in money market instruments is called a liquid fund. A liquid fund ensures that the principal amounts you have invested are safe. It also gives a decent return as its earnings are from interest.

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Why invest in Debt Funds

Safer than Equity

Investments in debt funds are not affected by volatility in the stock market. This reduces risk in your investment.

 

Stable Returns

You get lesser but more stable returns, than equity. You replace volatility with stability. Debt funds are more liquid than fixed deposits.

Flexibility

You can invest small amounts regularly through the SIP route. Whenever you have extra money, you can invest it in debt funds.

Taxation Benefit

The profit you make in the long term is taxed with an indexation benefit. You save on your taxes.

 
Types of Debt Funds

Fixed Maturity Plans

Fixed maturity plans are closed ended and invest in debt which matches the term of the scheme.

Fixed maturity plans have tenures ranging from 3 months to 5 years. You must invest in a Fixed maturity plan which matches your financial goals.

Income Funds

Income funds invest in Government bonds, securities and even corporate debentures. They invest across a wide range of maturities. They invest in short term instruments of 1-2 years and also in long term instruments of 10-15 years.

Short Term Fund

They invest in debt such as bonds, commercial paper and certificates of deposit with a maturity of 3-6 months.

Taxation of Debt Schemes

Short term capital gains (gains under 3 years), are added to your taxable salary. Taxed as per income tax slab you fall under. Long term capital gains (gains over 3 years), are taxed at 20% with indexation.

 

Concepts & FAQ's Debt Funds

What is a Debt Mutual Fund?

Debt Mutual Funds are those funds in which the pool of money of the investors is invested in mainly in short-term or long-term bonds (Government or Corporate) etc. This is done to provide a fixed income. The main objective of a debt fund is preservation of capital and generation of income on a steady basis.

What are bonds?

Sometimes large organizations or even countries need money for various purposes. The solution is to raise money by issuing bonds to a public market. Thousands of investors then essentially provide or loan a portion of the capital needed. By purchasing bonds an investor becomes a creditor (i.e gives Debt) to the corporation or government for which he/she is entitled to a fixed interest after a certain period (maturity).

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What is the advantage of buying bonds (debt) over buying stocks (equity)?

The main advantage of being a creditor is that you have a higher claim on assets than shareholders. Therefore even in case of bankruptcy, a bondholder will get paid before a shareholder. Thefore buying a bond (debt) involves less risk than buying stocks (equity). However, the bondholder does not share the profits if a company does well.

For whom are Debt Mutual Funds suitable?

Bonds are known as fixed-income securities because the exact amount of cash one gets back if one holds the security until maturity is known. Debt Mutual Funds are suitable for conservative investors and retirees. It is also suitable for those investors who are looking for a certain return of their investment in a short period of time.

Frequently Asked Questions

What are Debt Markets and Debt Market Instruments?

Typically those instruments that have a maturity of more than a year are called debt market instruments. The main types are - Government Securities (G-secs or Gilts) Like T-bills, gilts are issued by RBI on behalf of the Government. These instruments form a part of the borrowing program approved by Parliament in the Finance Bill each year (Union Budget). Typically, they have a maturity ranging from 1 year to 20 years. Like T-Bills, Gilts are issued through the auction route but RBI can sell/buy securities in its Open Market Operations (OMO). OMOs include conducting repos as well and are used by RBI to manipulate short-term liquidity and thereby the interest rates to desired levels The other types of Government Securities are Inflation linked bonds Zero coupon bonds State Government Securities (State Loans)

What are debt funds?

Debt funds are those funds which invest a majority of their assets into fixed income bearing instruments such as bonds, debentures, government securities, certificates of deposit, commercial papers and other money market instruments. Debt funds are also called income funds as they normally provide a stable income to the investors, while minimizing the element of risk.

How can a fund's performance be tracked?

A fund's performance can be tracked by tracking its NAV. The NAVs are calculated usually on a daily basis and the fund's performance can either be measured against various benchmarks such as a stock market index like the Sensex, Nifty, BSE 200, etc.

What is NAV?

Net Asset Value (NAV) of a fund is the total market value of all the investments of the fund (minus its expenses) divided by the number of units outstanding, on that given day. Buying and selling of mutual funds, as well as its performance is based on its NAV.

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Sebi cancels registration of KJMC Mutual Fund

Wednesday, June 20, 2018, 10:10 PM

Sebi today revoked the registration of KJMC Mutual Fund following a request from it. The Securities and Exchange Board of India (Sebi) has also withdrawn the approval granted to KJMC Asset Management Company (AMC), to act as the AMC to the mutual fund. Last month, the regulator had cancelled the registration certificate of JP Morgan Mutual Fund.
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ICICI Prudential launches healthcare, diagnostics investment fund

Tuesday, June 19, 2018, 8:14 PM

ICICI Prudential AMC has launched an open-ended equity mutual fund which will invest across the spectrum of healthcare and related sub-sectors, including diagnostics companies as well. ICICI Prudential Pharma Healthcare and Diagnostics (PHD) Fund is an open-ended scheme. The funds NFO (new fund offer) will open on June 25 and will close on July 9.
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MFs investment is becoming popular, small savings schemes losing sheen

Thursday, June 14, 2018, 12:03 PM

In a major worry, small savings schemes, including public provident funds, are witnessing a sharp decline in terms of monthly receipts, as per the latest Reserve Bank of India (RBI) data. While the decline in receipts for small savings schemes was evident, it came even as mutual funds are increasingly getting more investments, the report says.
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Benefits of making a nomination for a mutual fund

Saturday, April 28, 2018, 9:07 AM

If a nomination is made for mutual fund, the funds can be easily transferred to the nominee. If something happens to the investor and the nomination is not made, it will be difficult for heirs to claim the mutual fund investment. They have to submit documents such as WILL and NOC from other heirs to get the mutual fund investments transferred to their name.
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What is a nomination in mutual funds?

Saturday, April 28, 2018, 9:05 AM

A nomination is a process of appointing a person called the nominee to take care of your assets, in case something happens to you (The Unit holder). It is compulsory to appoint a nominee for the mutual fund schemes you hold. If you have mutual funds in the demat account, you must appoint a nominee for this account.
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#5. Debt mutual funds

Wednesday, April 11, 2018, 7:10 AM

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