Debt Funds are also known as fixed income funds or Bond funds. A debt funds are Mutual funds that invest in Fixed income securities such as corporate bonds, Government bonds & money market instruments. This is a relatively stable investment avenue that could help to generate wealth.

Benefits of investing in debt funds

  • Debt Funds have potential to offer capital appreciation over a period of time.
  • Debt mutual funds are liquid, and you can withdraw your money from the fund on any business day.
  • If tax reduction is a crucial investment goal, you can consider investing in debt mutual funds. This is because debt funds are more tax-efficient than traditional investment options.
  • No deduction of taxes or TDS on the earning from debt funds. Taxes to be paid only when an investor withdraw fund units
  • By investing in debt funds, you can adequately diversify your portfolio and bring down overall risk.
  • Debt funds can be suitable for meeting short term goals. So, if you have an investment horizon of 10 to 12 months or a maximum of 1 to 2 years, you can opt for debt mutual funds.

Types of Debt Mutual Fund

Overnight Funds:

Overnight funds are safest among debt funds. Overnight funds are ideal for those with an investment horizon of one week or less, as investors can redeem after holding the units for even one day. This flexibility is a big advantage of overnight funds over liquid funds, which now charge an exit load for redemptions within seven days.

Liquid Funds:

The entire point of investing in a liquid fund is to maintain a high degree of liquidity. The benefit of these funds is primarily felt by those investors who have surplus funds to park in an income generating investment. If you have a good amount of cash which is not invested anywhere and are looking for a short-duration investment option with lower risks, then liquid funds are ideal

Short-Term and Ultra Short-Term Debt Funds:

These fund schemes are popular among new investors who want a short-term investment with minimal risk exposure. These schemes have a maximum maturity of 3 years and usually a minimum maturity of 1 year.

Gilt Funds:

These schemes invest primarily in government-issued securities which carry a very low level of risk and are generally rated quite high

Fixed Maturity Plans:

Fixed maturity plans can be closely likened to fixed deposits. These schemes have a mandatory lock-in period that varies depending on the scheme chosen. The investment must be done once, during the initial offer period, after which further investments cannot be made in this scheme.