Debt funds (also called ‘Bond Funds / Income Funds’) are those mutual funds where the investment is made in corporate bonds or other debt instruments.
The debt instruments include commercial papers, treasury bills, government securities, corporate bonds, and other money market instruments.
The issuers of the debt instruments, before issuing to the investors, will decide the interest rate as well as the maturity period of the fund. So, these mutual funds generate a fixed income (regular income) upon investment.
Debt funds are less volatile (less risky) when compared to equity funds.
What are the Advantages or Benefits of Investing in Debt Funds?
Some of the key advantages of investing in debt mutual funds are listed below:
- Debt funds are suitable for new investors, risk-averse investors, and those who are looking for short- term (3-12 months) to medium term (3-5 years) investment.
- The selection of the debt instruments is by checking its credit rating. Hence, high-quality debt instruments can be had, and a higher rating indicates that the issuer is less likely to default in giving the principal and interest.
- Debt funds are less volatile and, therefore less risky than equity funds.
- They offer relatively stable returns and returns that are higher than fixed deposits.
- Debt funds also provide tax benefits. The short-term gains (i.e. funds of less than three years) on debt funds are taxable as per the tax slab rate. The long-term gains (i.e. up to three years or more) on debt funds are taxable at 20% with the advantage of indexation.
- Debt funds are of different types that suit the interests of diverse investors.
Types of Debt Funds
Debt funds are categorized into several types based on the maturity period of the underlying debt instruments. The types of debt funds are listed below.
- Income Funds
- Dynamic Bond Funds
- Short Term Debt Funds
- Gilt Funds
- Credit Opportunities fund
- Fixed Maturity Plans (FMP)
- Liquid Funds
Best Debt Funds in INDIA
Before investing in debt funds, as an investor, it is highly important to analyze the risk and return of the fund, the expense ratio, tax benefits, and the investment horizon of the debt fund.
The following are some of the best performing debt mutual funds in India:
- SBI Magnum Constant Maturity Fund
- UTI Gilt Fund
- Kotak Dynamic Bond Fund
- Aditya Birla Sun Life Government Securities Fund
- ICICI Prudential Constant Maturity Gilt Fund
*The order of funds mentioned above doesn’t suggest any recommendations. Investors may choose the funds as per their goals and risk capacity. Returns are subject to market risks.
