Every earning individual wants to invest their hard-earned money appropriately. As an investor, you have multiple opportunities available to you that must be analyzed carefully. Understandably, you want your money to be in the right hands to ensure the best returns possible. Mutual funds are a financial vehicle thatprovideinvestors access to professionally managed investments. There are different levels of risks and rewards associated with different kinds of mutual fund investments. Debt funds are a type of mutual fund investment in securities like treasury bills, government securities, corporate bonds, commercial paper and other money market instruments. They are also known as fixed-income securities, as the issuer decides the interest rate you will receive as well as the maturity period in advance.
Debt funds are an ideal mutual fund investment option for several reasons. Here are a few of them listed in detail:
- Liquidity
Debt funds are known to be highly liquid as you can withdraw the money upon your wish. It is often compared to fixed deposits that have a specific lock-in period, and the withdrawals might take a long time to process in case the investors wish to liquidate it.
On the other hand, debt funds have a higher degree of liquidity and investors can withdraw with more ease, relatively. You may not know when the need for money arises. Therefore, debt funds are a great option of mutual fund investments to keep your money as an emergency reserve.
- Low Risk-Factor
Most people are hesitant to put their money in mutual fund investments because of the risks involved. Equity mutual funds are known to be a risky investment option as they are highly sensitive to economic factors such as inflation, currency fluctuations, tax rates and more. However, debt funds are an ideal option for investors looking for low-risk mutual fund investment. There are no fluctuating elements as debt funds primarily invest in rated and risk-free government and corporate bonds.
- Tax Efficiency
Tax-efficiency is a vital factor that makes debt funds an ideal choice for mutual fund investment. Debt funds are far more tax-efficient than alternative investment options like fixed deposits.In case you hold your mutual fund units for less than three years, you pay Short Term Capital Gains (STCG) tax at income tax slab rates and for investments beyond three years, Long-Term Capital Gains (LTCG).The LTCG are eligible for indexation benefits, which means that you will be taxed only on returns over the inflation rate.
- Flexibility
Debt funds allow great flexibility to this investment. You can conveniently shift the money from debt funds to equity funds or any other asset of your choice. Systematic Transfer Plan(STP) allows the investor to invest a lump sum amount in debt funds and, after that, transfer small portions of it into equity at regular intervals. Most investment options do not allow this level of flexibility.
- Diversification
Debt funds are an essential mutual fund investment choice when you wish to spread out the risk. Equity funds are said to be volatile and increase the stakes of the investment. Debt funds work perfectly to bring down the overall risk as it diversifies your investment portfolio.
When you start earning, financial planning becomes an essential part of your life. You aim to maximize your savings and secure the future of your family.A well-planned life undoubtedly gives favourable financial results in the long term. As an investor, you must be aware of promising mutual fund investment options. The right investment opportunity can help harness multiple advantages. Unlike traditional investment options, mutual fund investments like debt funds bring significant benefits.
It is essential to recognize long and short term needs of yourself and your family. Prominent financial advisors, such as FinEdge, help in creating an investment plan tailored to your requirements. Invest wisely and at the right time by taking the help of professionals.