Debt Mutual Funds

Posted in: Investment | on: July 24, 2020

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Mutual Fund remains as a highly popular investment choice among investors as it helps them to gain higher returns when compared to the traditional investment platforms such as gold, real estate, fixed deposits etc. As mutual funds are highly risk in nature, it is wise for the risk-averse investors to opt for debt mutual funds. Debt mutual funds are less risky than equity investment. But debt mutual funds offer lower returns when compared to equity investment.

What is Debt Mutual Fund?

Debt mutual fund is an investment in debt or fixed income securities such as bonds, treasury bills, commercial papers, government securities and different money market securities. As the maturity date and interest rate which the investor earn on maturity is pre-decided, it is also known as fixed-income funds. Debt mutual fund is an ideal choice for investors those who wish to earn risk-free returns. The debt fund returns are not subjected to market fluctuations. Hence, debt funds are regarded as low-risk investment choice. Just like other mutual funds, the units of debt funds can be purchased or redeemed at the appropriate Net Asset Value on any business day.

What are the types of Debt Mutual Fund?

Based on the maturity period, the Securities and Exchange Board of India (SEBI) has recently categorized debt mutual funds into 16 categories. These categories differ from each other in terms of maturity period and risk level. Investors who seek low interest rate risk should opt for schemes such as short duration fund, ultra short duration fund, liquidity fund, etc., On the other hand, investors who don't want to take too much risk should avoid investing in credit risk funds and should go for corporate bond funds and banking & PSU funds. The 16 categories are,

  • Money Market Fund
  • Liquid Fund
  • Banking and PSU Fund
  • Corporate Bond Fund
  • Credit Risk Fund
  • Floater Fund
  • Dynamic Bond Fund
  • Gilt Fund
  • Ultra Short Duration Fund
  • Low Duration Fund
  • Short Duration Fund
  • Medium Duration Fund
  • Long Duration Fund
  • Medium to Long Duration Fund
  • Gilt Fund with 10-year constant duration
  • Overnight Fund

Money Market Fund:

  • Money market fund scheme invests in money market securities.
  • The maturity period is maximum one year.
  • This scheme suits well for investors who seek short-term, low-risk debt fund.

Liquid Fund:

  • Liquid fund scheme invests in money market securities.
  • The maturity period is up to 91 days.
  • This scheme is safe for investors who wish to invest money for a few days or weeks.

Banking and PSU Fund:

  • Banking and PSU fund scheme invests minimum 80% of its total assets in debt securities of banks and Public Sector Undertakings (PSUs).

Corporate Bond Fund:

  • Corporate bond fund scheme invests minimum 80% of its total assets in corporate bonds with highest ratings.
  • This scheme is good for risk-averse investors who wish to invest in top-ranked corporate bonds.

Credit Risk Fund:

  • Credit risk fund scheme invests mainly on low-rated corporate bonds.
  • As per the SEBI rule, this scheme invests at least 65% of its total assets in lower-rated corporate bonds.
  • This scheme carries credit risk amount and provides somewhat better returns than the high-quality bonds.

Floater Fund:

  • Floater fund scheme invests at least 65% of its total assets in floating rate securities.
  • The interest rate risk is low in this scheme.

Dynamic Bond Fund:

  • Dynamic bond fund scheme invests in debt securities of different maturities depending on the interest rate policy.
  • This scheme is ideal for investors with moderate risk-averse.
  • The investment horizon for this scheme is 3 to 5 years.

Gilt Fund:

  • Gilt fund scheme invests 80% of its total assets in government securities with different maturities.
  • As there is no credit risk in this scheme, the interest rate risk is high.

Ultra Short Duration Fund:

  • Ultra short duration fund scheme invests in debts and money market securities.
  • The Macaulay duration is between three and six months.

Low Duration Fund:

  • Low duration fund scheme invests in debt and money market securities.
  • The Macaulay duration is between six and twelve months.

Short Duration Fund:

  • Short duration fund scheme invests in debt and money market securities.
  • The Macaulay duration is between one and three years.

Medium Duration Fund:

  • Medium duration fund scheme invests in debt and money market securities.
  • The Macaulay duration is between three and four years.

Long Duration Fund:

  • Long duration fund scheme invests in debt and money market securities.
  • The Macaulay duration is more than seven years.

Medium to Long Duration Fund:

  • Medium to long duration fund scheme invests in debt and money market securities.
  • The Macaulay duration is between four and seven years.

Gilt Fund with 10-year Constant Duration:

  • This scheme invests at least 80% of its total assets in government securities.
  • This scheme comes with the maturity period of 10 years.

Overnight Fund:

  • Overnight fund scheme invests in debt securities.
  • The maturity period for this scheme is 1 day.
  • The funds are so safe as both credit risk and interest rate risk are very low.

Who can opt for Debt Mutual Fund?

You can opt for debt mutual fund in the following cases.

  • If you have surplus money to park with and have the ability to take little bit risk in gaining returns higher than fixed deposit or savings bank account.
  • If you want to invest your money for 3 to 4 years.
  • If you are unwilling to invest in equity fund.
  • If you are unsatisfied with current rate of returns offered by savings bank account.
  • If you want to earn higher returns than fixed deposit scheme.
  • If you want additional income to support your family.

What are the benefits of investing in Debt Mutual Fund?

Some of the advantages of investing in debt mutual funds are,

High returns:

Debt mutual funds offer higher returns than savings bank accounts and fixed deposits.

High liquidity:

When compared with fixed deposits, debt mutual fund scheme offers fixed income without any mandatory lock-in period. As the liquidity ratio is high in this scheme, investors can withdraw their investment fund much quicker than other investment schemes.

Flexibility:

Unlike fixed deposits, the investment amount in debt mutual fund scheme can be transferred easily to equity scheme or any other scheme chosen by the investor. Other investment options lack this facility. For instance, fixed deposits can either be opened or closed but not transferred.

Tax benefit:

Capital gains from debt mutual funds that have less than three years of maturity comes under taxable income and taxed accordingly. After three years of holding, the debt mutual funds will be considered as long-term capital gains and taxed at 20% after indexation.

Which is the best Debt Mutual Funds to invest in 2020?

Name of the Fund 1 year return 3 year return 5 year return
Reliance Gilt Securities Fund 18.45% 10.13% 12.20%
Franklin India Dynamic Accrual Fund 9.79% 9.29% 10.42%

SBI Magnum Medium Duration Fund

11.64% 9.55% 10.18%
ICICI Prudential All Seasons Bond Fund 11.23% 8.58% 10.72%
Axis Dynamic Bond Fund 13.84% 8.37% 10.16%

 


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