Debt Mutual Fund A brief Concept before you Invest

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Haziran 14, 2021


As the term suggests, Fixed Maturity Plans or FMPs have a fixed locked-in period. Because of the lock-in period, the FMPs are not affected by changing interest rates. So, the NAV or the Net Asset Value of the fund remains the same.


This debt scheme mainly invests in the highest rated corporate bonds. The fund can invest a minimum 80 percent of its total assets in the highest-rated corporate bonds. Corporate bond funds are a great option when it comes to good return and low-risk type investment. Investors can earn a regular income which is usually higher than that of interest on your Fixed Deposits . The money market fund invests in many markets such as commercial/treasury bills, commercial papers, Certificate of Deposit and other instruments specified by the Reserve Bank of India . These investments are a good option for risk-averse investors who want to earn good returns in short duration.

Also, liquid fund’s investment returns are better than that of a Savings Account. The duration or maturity of a debt fund is important because it helps in optimizing returns at a given risk and maturity. Example- a liquid fund has an average maturity ranging from a few days to a month and it is a better option for an investor looking for an investment option for a few days. On the other hand, for investors looking for an investment option for say a year, short-term debt funds will be an ideal option. In terms of operation, debt funds are not entirely different from other mutual fund schemes.

NAV or Net Asset Value

But if you redeem your debt mutual fund after 3 years than the gains/profit are taxed at 20% after indexation. Indexation is the process of adjusting the value of investment in align with inflation to protect your capital gains against tax erosion.” Bond prices generally rise or fall in response to interest rate changes, or like any market, the expectation of interest rate changes. Higher the maturity period of the bond, more sensitive they are to change in interest rate. During the falling interest rate period, the debt fund’s yield improves, and they give better returns and vice-versa during increasing interest rate period. This risk is maximum in Gilt Funds as their average maturity period is very high (10+ years) and least in overnight & liquid funds which have maturity of not more than 90 days.

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Despite such a widespread presence, fixed-income securities or debt securities seem like uncharted territory for most investors. Debt Funds enable a retail investor to invest and gain exposure to the debt market. SEBI has capped maximum expense ratio of mutual funds at 2.25%. Ideally investors should ensure that the fund’s expense ratio is in line with its peers. Majority of fund managers invest in AAA or A1 rated bonds as they are highly safe.

It refers to a sustained increase in the general price level of goods and services in an economy over a period of time. The weekend NAVs of Liquid schemes will be sent on the subsequent Monday. 5 Reasons Why SmartSIP is better than SIP Over the last few years many people have realized the benefits of investing in Mutual Funds.

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Being less sensitive to market movements, they may not generate as high returns as equity funds but also do not fall rapidly. Liquid Funds, as the name suggests, invest predominantly in highly liquid money market instruments and debt securities of very short tenure and hence provide high liquidity. Debt funds are suitable for investors with a low to moderately risk appetite. Debt funds are less volatile in short term and therefore less risky than equity funds. Debt funds are recommended to conservative investors who don’t want to place a bet on equity funds.

subject to market

The difference between the returns of a mutual fund and its benchmark is known as a fund’s tracking error. The profit/ loss generated from an investment, expressed as a percentage of total amount invested. The term portfolio refers to any collection of financial assets. When 65% or more of the portfolio is invested in stocks of mid and small size companies. Dividends that would otherwise be paid out to investors in the fund are used to purchase more units in the fund. One method of calculating the expected returns of a stock is through Capital Asset Pricing Model.

Better returns

However, there are many more nuances to debt fund investments. Debt funds also do not offer assured returns but have market linked returns which can fluctuate. Rising interest rates can have a positive impact on yields / interest income but a negative impact on bond prices. Floating rate funds – These funds invest in debt instruments whose returns fluctuate depending on the Reserve Bank of India’s interest rate.

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No TDS is deducted in hand of investors on returns in debt funds, but in FDs, if your interest exceeds INR 10,000 then it is subjected to TDS by the bank. The entire income in a fixed deposit is taxable at the slab rate applicable to an individual. But in debt funds, if you hold an investment for more than 36 months you are taxed at 20 percent with an indexation benefit of the cost. Credit Risk- The risk of default in payment of the interest amount and principal amount invested. Here, the higher the credit score of a debt mutual fund the more reliable it is.

Information Ratio

Small investors may find it difficult to invest in overnight bonds or government securities due to the larger lot sizes. Investor holding units of segregated portfolio may not be able to liquidate their holding till the time recovery of money from the issuer. Listing of units of segregated portfolio on recognized stock exchange does not necessarily guarantee their liquidity. Of these above risks, we have seen that in recent times due to the event of Franklin Templeton Mutual Fund closing down 6 of their Debt schemes, the Liquidity risk is gaining prominence. Banking and PSU Funds – These debt funds lend money only to banks and public sector companies.

  • The research, personal finance and market tutorial sections are widely followed by students, academia, corporates and investors among others.
  • These funds are hybrid in nature as they have the provision of investing a sizeable portion of the portfolio in debt markets.
  • Furthermore, if you’re a new investor in the debt market, choosing the right debt instruments may be difficult.
  • All you can do is to stick to safe schemes or schemes with most investments in highest-rated instruments.
  • If you want to invest for 1 day to up to a month then opt for Overnight Funds or Liquid Funds.

Anyone who wishes to add a level of dive and safety to their portfolio can invest in Debt Mutual Funds. Fi is a neobank aka online banking platform, that attempts to re-imagine the banking experience in India. The Fi account, in partnership with Federal Bank, is a digital bank account that gives you the fastest way to open a bank account online.

This fund invests in securities which have a maturity period of 1 day. Overnight Fund carry minimal credit risk and interest rate risk owing to such a short maturity period and are hence perceived to be relatively stable. Debt funds are subject to interest rate risk, credit risk, and liquidity risk. The fund value may fluctuate due to the movement in the overall interest rates. You have to assume these risks when you invest any debt fund plan. These funds can be available throughout a variety of credit risk and maturity.

fund manager

Hence MIPs are preferred option for investors seeking steady income flows. DBFs invest in debt securities of different maturity profiles. Such funds give the fund manager the flexibility to invest in short- or longer-term instruments based on his view on the interest rate movement. DBFs follow an active portfolio duration management strategy by keeping a close watch on various domestic and global macro-economic variables and interest rate outlook. Corporate Bond Fund – which invests a minimum of 80% of its total assets in corporate bonds having the highest ratings.

They example of debt fund primarily in debt instruments of various maturities in line with the objective of the funds and any remaining funds in short-term instruments such as Money Market instruments. These funds generally invest in instruments with medium- to long-term maturities. That’s because funds don’t disclose if there are any investor who owns a substantial chunk of outstanding units.

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