How to Select the Correct Debt Fund

Debt funds in mutual funds are a type of mutual fund that invests in debt securities such as corporate bonds, money market instruments, commercial paper, certificate of deposit, treasury bills and government securities.

Types of Debt Funds in India

  • Dynamic Bond Funds

Dynamic bond funds are a type of debt fund that invest across duration and have different average maturity periods as these funds take investment decisions based on interest rates and invest in instruments of longer as well as shorter maturities.

  • Short Duration Funds

These type of debt funds make investments in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1 year – 3 years.

  • Liquid Funds

Liquid funds are a type of debt funds that invest in debt instruments with a maturity of not more than 91 days. This makes them relatively less risky. They are better alternatives to savings bank accounts as they provide similar liquidity with higher returns.

  • Gilt Funds

These type of debt funds make minimum investment in Gsecs- 80% of total assets (across maturity). Gilt funds are perfect for risk-averse fixed-income investors.

  • Fixed Maturity Plans

These funds also make investments in fixed income securities like corporate bonds and government securities. All FMPs have a fixed period for which your money will be locked-in. However, one can invest only during the initial offer period thereafter can be purchased or sold through stock exchange platform.

From an investor’s point of view, debt funds in India are regarded as relatively less volatile than equity funds. However, there are different types of risks associated with debt funds.

The following factors should be considered before investing in debt funds.

  • Types of Risk in Debt Funds

Debt funds run the risk of credit risk and interest rate risk. In case of credit risk, the fund manager may invest in securities with a poor or risky credit rating with a high probability of default on payment. In case of interest rate risk, the bond prices may fall due to an increase in the interest rates.

  • Cost

Debt fund managers levy a certain fee to manage the money called an expense ratio.

  • Investment horizon

If you have a short-term investment period of three months to one year, then investing in liquid funds is ideal. The Macaulay duration of underlying investments for short-term bond funds can be one year to three years. In case of investment across duration, dynamic bond funds would be appropriate. The longer the time plan, the better the returns.

  • Investment objective

Depending on your financial goals, different types of debt funds could serve your purpose. Investors can park a certain amount of funds in debt funds for liquidity.

  • Tax implications

Capital gains – both long term and short term from debt funds are taxable under the Income Tax Act 1961.

Disclaimer: The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video.

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