A debt mutual fund invests largely in fixed-income securities, including government bonds, corporate bonds, treasury bills, commercial papers, and other debt securities. By investing in relatively risk-free fixed-income securities, the objective of debt mutual funds is to provide consistent income to clients while also enhancing their value over time.
These funds are managed by experienced fund managers who have the objective of achieving the highest possible returns for their clients via the management of diverse portfolios of debt securities investments. Conservative individuals who are searching for low-risk investment choices that generate a consistent income may find it beneficial to invest in debt mutual funds.
This article covers:
- Benefits Of Debt Mutual Funds
- Types Of Debt Mutual Funds
- Debt Mutual Fund Taxation
- Best Debt Mutual Funds
- How To Invest In Debt Mutual Funds?
- What Is A Debt Mutual Fund- Quick Summary
- What Is A Debt Mutual Fund- Frequently Asked Questions
Benefits Of Debt Mutual Funds
Debt mutual funds offer high liquidity, allowing investors to easily access their money. They are a tax-efficient alternative to fixed deposits and exhibit lower volatility due to their low-risk fixed-income instruments. These funds are considered safer investment options, making them suitable for investors with low-risk tolerance seeking consistent income and stability.
1. High Liquidity
Due to the high liquidity of debt mutual funds, investors are able to purchase or sell their holdings in the fund at any moment with no difficulty. Because of this, investing in debt mutual funds is an excellent choice for individuals who want easy access to the money they have invested.
2. Tax Efficiency
As compared to other investment alternatives like fixed deposits, debt mutual funds are a tax-efficient alternative to investing in fixed deposits. Only when an investor redeems their fund units or sells them does the tax that is owed on debt mutual funds come into play. The length of time that fund units are held might affect the tax rate that is applied.
3. Low Volatility
As compared to other kinds of mutual funds, debt mutual funds are thought to be the ones with the lowest level of volatility. Since the underlying assets in the portfolio are often low-risk fixed-income instruments, the fund is less vulnerable to market swings.
4. Safer Investment Option
Mutual funds that invest in debt often purchase highly rated debt instruments, regarded as among the most reliable investment alternatives. Because of this, investing in debt mutual funds is considered one of the most secure options available compared to investing in other kinds of mutual funds.
In general, investors may benefit from the mix of safety, consistent income, and stability that debt mutual funds provide. They are appropriate for individuals with a low-risk tolerance who are searching for investment opportunities that provide a consistent stream of income.
Types Of Debt Mutual Funds
A few of the most prevalent types of debt mutual funds are as follows:
1. Dynamic Bond Funds
Dynamic bond funds invest in fixed-income assets that have variable maturities. While managing a dynamic bond fund, the fund manager has the ability to shift their holdings across several categories of fixed-income securities in response to changes in the market. These funds are appropriate for investors who are comfortable taking a modest amount of risk in exchange for the possibility of greater returns.
2. Corporate Bond Funds
Corporate bond funds invest largely in debt instruments that are issued by corporations. Investors who are ready to assume a modest risk in exchange for the possibility of better returns than those offered by government bonds might consider investing in these funds.
3. Money Market Fund
Money market funds invest in highly liquid money market securities with maturities of up to one year. These money market products include treasury bills, commercial papers, and certificates of deposit. Investors seeking low-risk investment choices that provide a high level of liquidity may find these funds to be acceptable for their needs.
4. Liquid Funds
Liquid funds invest in highly liquid debt instruments such as treasury bills, certificates of deposit, and commercial papers having a maturity of up to 91 days or less. Investors that are seeking investment opportunities with low risk, high liquidity, and low volatility may find these funds to be a good fit for their portfolios.
5. Credit Option Funds
Credit option funds invest mainly in debt instruments with lower credit ratings, such as bonds with ratings of AA and below. Investors who are ready to take on greater levels of risk in exchange for the possibility of larger returns may consider these funds.
6. Short-Term and Ultra Short-Term Funds
Short-term and extreme short-term funds invest in fixed-income assets with a maturity of up to three years. Investors who are interested in low-risk investing solutions that provide a return that is somewhat greater than that of liquid funds might consider these products.
7. Gilt Funds
Gilt funds invest in various types of government securities during the course of its holding period. Those who are seeking low-risk investing choices and are ready to invest for a longer period of time would do well to consider these funds as an option.
8. Fixed Maturity Plans
Fixed maturity plans to invest in fixed-income assets with a predetermined maturity period. Investors who are searching for low-risk investment choices that provide a set return and a defined maturity date will find these funds to be a good fit for their portfolios.
Debt Mutual Fund Taxation
The debt mutual funds are taxed in the following ways:
- From 1st April 2024, the earnings from debt mutual funds are taxed according to the investor’s tax slabs in which their total income falls if the fund holds equity instruments of not more than 35%.
- Apart from these, gains on an investment that has been held by the investor for less than three years will be added to the investor’s taxable income and taxed at the investor’s individual marginal tax rate.
Best Debt Mutual Funds
| Name of the fund | AUM (in Cr.) | Expense ratio (%) | 5Y CAGR (%) |
| Axis Dynamic Bond Fund | ₹ 2,34,530.48 | 0.26% | 8.12 |
| HDFC Corporate Bond Fund | ₹ 4,28,345.50 | 0.32 | 7.60 |
| ICICI Prudential Medium Term Bond Fund | ₹ 4,93,519.16 | 0.77 | 7.84 |
| Aditya Birla Sun Life Short Term Fund | ₹ 2,74,923.15 | 0.38 | 7.80 |
| SBI Magnum Ultra Short Duration Fund | ₹ 4,78,186.89 | 0.31 | 6.08 |
| UTI Bond Fund | ₹ 1,49,188.56 | 1.30 | 4.61 |
How To Invest In Debt Mutual Funds?
You can invest in debt mutual funds through your Demat account or by visiting the website of a mutual fund house or for a simpler method, you can open a Demat account in Alice Blue Online. The steps for investing in debt funds are as follows:
- Once you have opened up your Demat account with Alice Blue Online using proper information, you need to open up their official website and visit the login page.
- From there on insert your credentials to access your Demat account.
- Next, open the Alice Blue Online mutual fund to go through the list of mutual funds available on the website and select the scheme you want to choose.
- Now you can invest your funds in the debt mutual fund of your choice and start your investment journey.
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What Is A Debt Mutual Fund- Quick Summary
- Debt mutual funds are mutual funds that invest in fixed-income securities, including bonds, treasury bills, commercial papers, etc.
- The benefits of debt mutual funds are high liquidity, tax efficiency, and low volatility.
- The types of debt mutual funds are dynamic bond funds, corporate bond funds, money market funds, liquid funds, etc.
- The debt mutual funds are taxed according to the holding period and the investors’ tax slabs.
- Some of the best debt mutual funds are Axis Dynamic Bond Fund, HDFC Corporate Bond Fund, etc.
- An investor can invest in debt mutual funds through his Demat account after selecting from various types of debt funds.
What Is A Debt Mutual Fund- Frequently Asked Questions
Debt mutual funds are mutual funds that invest in fixed-income securities, including bonds, treasury bills, commercial papers, and many other debt instruments.
Yes, it is good to invest in debt mutual funds as they are an excellent investment choice for individuals who are seeking low-risk investing alternatives in addition to regular income opportunities.
Yes, debt mutual funds are safe as they invest in debt instruments that provide stable returns. But they still carry liquidity risk, credit risk, interest rate risk, etc.
Debt mutual funds are better than FD because they can provide higher returns in the long term. They are also more advantageous from a tax perspective than the FD.
The risk in debt mutual funds is that if the credit quality of the underlying debt securities held in the portfolio deteriorates, then this will lead to a decrease in the NAV of the fund.
Yes, you can withdraw from debt mutual funds anytime, as they offer high liquidity and you can sell the units back to the fund house at the current NAV.
Debt mutual funds pool the capital contributed by several participants to purchase fixed-income assets like bonds, treasury bills, commercial papers, etc., and distribute the units to the investors.
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