Purchasing a debt instrument could be viewed as a kind of lending money to the company that issued it. One of the primary purposes of a debt fund is to generate interest income through the purchase of fixed-interest assets such as debt instruments as well as government securities. One of the primary benefits of investing in debt funds seems to be the ability to benefit from both a predictable stream of interest income and the potential for capital growth. The issuers predetermine the interest rate and maturity period of debt instruments. As a result, these instruments are sometimes known as ‘fixed-income’ securities.
Pros of Debt Funds you must know about
More profitable than most fixed income instruments
Financial products such as CDs, corporate bonds, T-Bills, G-Securities, and other financial products can be found in debt funds. At the end of the term, these securities pay interest (coupons) as well as the face value (principal). Many of these securities have greater interest rates than bank FDs of the same maturity. With a AAA rating, corporate bonds can also have yields that are 150 to 200 basis points (bps) greater than the interest rates offered by bank deposits. Because these securities are traded just on the market, you may also benefit from an increase in their value in addition to the increased dividends. Using the table below, you can see how various debt fund types fared over various time periods.
Good backup option
Debt funds, in contrast to most other investment options, have no lock-in period and a penalty for early withdrawal. You may cash out of your investment considerably more easily than with most other options, including fixed deposits. As a result, if you have concerns about the possibility of a personal and medical necessity necessitating more finances, debt funds can be a good investment choice.
Tax saving
The tax advantages of debt mutual funds sometimes outweigh the disadvantages of other investing options. Unlike other traditional investment options, debt funds are taxable only when they have been redeemed, and only the redemption proceeds are taxed. An investor’s tax bracket determines whether or not a payout from a debt fund is taxable. Investments kept for longer than three years may give superior post-tax returns because of the lower LTCG (Long Term Capital Gains) tax rate of 20% and indexation.
Here are some Cons of Debt Funds
Riskier than other fixed income schemes
Bond funds primarily hold government securities and money market instruments like corporate bank deposits. Even yet, it is possible for a financial institution or corporation to consider itself delinquent in making interest payments on these deposits. That is why the debt fund is considered riskier than typical fixed-income investments (FDs).
Not easy to make wealth out of it
To put it another way: Debt mutual funds have poor returns compared to equities mutual funds, which is their main drawback. People who want to accumulate wealth should stay away from debt mutual funds since they can provide regular income, but wealth accumulation can only occur in financial markets or equity index funds.
Transactional Fee
Whereas the transaction fees of debt mutual funds are smaller than those of equity mutual funds, many investors may prefer to spend on fixed deposits instead of equity mutual funds because of the lack of expenses that come with fixed deposit investments.
Conclusion
The ordinary investor’s portfolio benefits greatly from debt funds. If you have longer or shorter financial objectives in mind, there are a range of debt mutual funds to pick from that can match your needs. If you want to invest in comparatively secured and fixed-income funds, then debt funds are perfect for you.