Why Is It A Good Time To Invest In Debt Funds?

By | March 6, 2017

Why Is It A Good Time To Invest In Debt Funds?

Over the last two years, interest rates have reduced significantly, and due to the demonetisation drive, liquidity of banks has also increased.

As a result, money parked in bank deposits are fetching relatively lower returns, urging investors with a low risk-appetite to look for alternatives.

Long-term Debt Mutual Funds could be a good investment about now. If you’ve so far given these funds a miss, now might be a good time to add them to your investment portfolio. Including Debt Mutual Funds in your portfolio will help balance out your risk by cushioning aggressive investment assets such as equities, which are subject to market fluctuations. Make the best of the good run that debt funds are currently experiencing.

Additional Reading: Introduction To Debt Funds

Overview Of Debt Funds

Debt funds typically invest in bonds, corporate deposits, commercial papers, etc. the prices of which go up when interest rates fall and vice versa. They are capable of providing higher returns with limited risk compared to bank deposits which are currently offering annualised returns of around 6%, or lower than 6% if you take tax into account.

Diverting some of your investments to debt funds could cushion the impact of the markets which are currently at peak levels and may course-correct soon. Debt funds might also beat inflation, giving you marginally better returns than bank deposits.

Going by the CRISIL AMDI Debt Performance Index for September 2016, debt funds have given returns of 9.73% for one year and 10.21% for three years.

Debt funds incur short-term capital gains tax as per the tax slab, long-term capital gains tax at 10% without indexation benefits and 20% with indexation benefits.

Which Debt Fund Should You Pick?

While there are various types of debt funds available such as long-term debt funds, income funds, short-term debt funds, gilt funds, dynamic funds, liquid funds, etc. you must pick one based on your investment objective and risk appetite.

While you can go for a liquid fund if you are looking for returns higher than that from the savings account and need fund within a short period of time, you can opt for long-term debt funds for long-term investments with higher returns.

Debt funds provide relative safety of capital and return higher than Fixed Deposits; making them a must-have for any investor looking for a degree of higher returns in his portfolio.


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About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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