What are Mutual Funds?

Mutual Funds are a type of financial investment vehicle that pool together funds from multiple investors.

In this article

  • 1) Analogy of Debt Mutual Funds

  • 2) What are Debt Mutual Funds?

  • 3) More About Debt Mutual Funds

There are many different types of mutual funds based on the securities that they invest in. For example:

  • Equity mutual funds invest in direct equity i.e. stocks
  • Debt mutual funds invest in bonds, treasury bills, CDs etc
  • Gold mutual funds invest in gold.

Today we will discuss the most stable mutual fund type in India - Debt Mutual Funds.

Mutual funds invests funds in securities such as:

Stocks

Analogy of Debt Mutual Funds

Before getting into the technicalities let us first try to understand what debt mutual funds are to help you get clear with the basics. Consider an example of a plant.

You plant a seed and nourish it daily. Slowly and slowly the seed sprouts into a young bud and grows further. All this growth process is slow and steady. You can’t expect it to grow to a tree in a single day. It is a gradual process that takes its own time.

This is exactly what debt mutual funds are. The amount that you invest in the debt funds grows slowly and gradually that gives you a steady income over time. Debt mutual funds invest in debt instruments and not equities therefore the returns generated by debt mutual funds are considerably lower than equity mutual funds.

What are Debt Mutual Funds?

Debt mutual funds are an investment avenue that comprises core holdings in fixed-income investments like:

  • Corporate debt securities
  • Government bonds
  • Corporate bonds
  • Money market instrument

Since debt mutual funds invest the corpus in bonds and government securities, this makes it a comparatively much less risky type and safeguards our investment with decent capital appreciation.

Hence, debt mutual funds are suitable for investors who are risk-averse and wish to gain regular income. Debt mutual funds invest in debt instruments and not equities therefore the returns generated by debt mutual funds are considerably lower than equity mutual funds.

Benefits of Debt Mutual Funds

Debt mutual funds offer several benefits that can be perfect for investors. Here are the benefits of it:

High liquidity: Investors can withdraw from debt funds any time they want and have it back in their bank account within a day.

Reduced risk: Since debt funds invest in debt securities, it has comparatively reduced risk than most of the investment options.

Tax benefit: Long term investments made in debt funds offer tax benefit of 20% with indexation. This method provides inflation-adjusted for investors.

Stability: Due to the low risk of debt funds, it offers stability in the portfolio of investors.

Convenience: One can invest in one-go through lump sum option or invest like instalments with SIP option.

Affordability: One can invest amounts as low as ₹ 500/- with the help of SIP option.

Regular income: Debt funds may generate regular and predictable returns.

Investment horizon: Debt funds fit almost all investment horizons from short term to long term.

More About Debt Mutual Funds

  • Investments made for less than 36 months are subject to STCG tax.
  • Investments made for more than 36 months are subject to LTCG tax.
  • Debt mutual funds are classified based on time and risks.
  • Debt mutual funds come with indexation benefit.
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FAQs

Q
What are debt mutual funds?
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A
Debt mutual funds invest in government and corporate bonds, government securities, etc. This makes it comparatively safer than most of the investment options.
Q
What is indexation?
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A
Indexation is a process that considers inflation from the time you bought the asset to the time you sell it. This is the benefit in the long term taxation of debt funds.
Q
Can investors invest starting from ₹ 500/- in debt funds?
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A
Investors can invest amounts as little as ₹ 500/- in debt funds with the help of SIP option.