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Category: Mutual Funds

  • What is Debt Mutual Funds: Invest in the Best Debt Funds in India

    What is Debt Mutual Funds: Invest in the Best Debt Funds in India

    What are Debt Mutual Funds?

    What Is Debt Mutual Funds

    Debt mutual fund is a category of mutual fund that invests in fixed-income instruments such as Corporate and Government bonds, commercial papers, treasury bills, state development bonds, etc. (T-bills are short-term debt instruments or money market instruments that the government of India issues. These are generally given for 91 days, 182 days, or 364 days. They are provided to fulfill the short-term financial needs of the government). 

    The primary objective of debt mutual funds is to generate income for investors through interest payments while preserving the capital invested. Debt mutual funds allocate their holdings across various debt instruments to diversify the risk. This helps the fund manager reduce the impact of poor performance by any single security.

    what are debt funds

    Debt funds invest in listed or unlisted securities, including corporate and government bonds. The NAV of the fund is calculated as the difference between the buy price and the sell price. Debt funds also receive regular interest from the underlying debt, which is added daily.

    A debt fund’s NAV also depends on the interest rate. Debt mutual funds are open-ended funds, which means investors can buy or sell fund units on any business day at the fund’s net asset value (NAV). When considering debt mutual funds, it’s essential to assess your investment goals, risk tolerance, and time horizon and select funds that align with your financial objectives.

    Who should invest in Debt Funds?

    ebt mutual funds

    Debt Funds are suggested for individuals who prefer capital preservation to higher returns because debt funds provide investors with consistent returns and are less volatile. Investors who want a regular income but are risk-averse i.e., refrain from taking risks with their investments.

    Read Also: Debt Mutual Funds: Meaning, Types and Features

    How to invest in Debt funds

    bank account deposits

    You can invest in direct debt funds through Asset Management Companies (AMCs), and in the case of regular debt funds, you need to contact mutual funds distributors (MFDs).

    Types of Debt Mutual Funds

    How To Choose Schemes In Debt Funds 

    These categories of debt funds cater to different investor preferences and financial goals. 

    1. Liquid Funds

    Liquid funds invest in very short-term debt instruments like T-bills, Certificates of deposits, and commercial paper and have a maturity of 91 days to generate optimum returns. Liquid fund invests in highly liquid money market instruments and debt securities. The best liquid funds to invest in India are ABSL Liquid Fund, Mahindra Manulife Liquid, PGIM India Liquid, SBI Liquid Fund, and Nippon Liquid Fund.

     2. Short-term Funds

    These funds invest in money and debt market instruments and government securities. The investment duration of these funds is longer than that of Liquid Funds. The best Short-term funds to invest in India are ICICI Prudential ST, UTI SD, HDFC ST Debt, Sundaram SD, and ABSL SD.

     3. Credit Risk Funds

    These funds invest in lower-rated corporate bonds and debt instruments to earn higher returns. The best Credit Rating Funds in India to invest in are DSP Credit Risk, Baroda BNP Paribas Credit Risk, Nippon India Credit Risk, and ABSL Credit Risk.

     4. Fixed Maturity Plans (FMPs)

    FMPs are close-ended mutual fund schemes, and the maturity dates in FMPs are decided beforehand. They invest in debt instruments with a specific date of maturity. FMPs are issued for a period ranging from 30 days to 60 months, and units of FMPs are listed on the stock exchange.

     5. Floating Rate Funds (FRFs)

    FRFs invest in instruments that offer a floating interest rate on your investments in bonds, government securities, and debentures. The best-floating Rate Funds to invest In India are ABSL Floating Rate, Franklin Ind Floating Rate, and HDFC Floating Rate.

     6. Gilt Funds

    Gilt in Gilt funds stands for government securities. This fund invests your capital in government securities issued by central and state governments. This fund offers you low credit risk and moderate returns. The best Gilt Funds to invest in India are ICICI Pru Gilt Fund, SBI Magnum Gilt Fund, DSP Govt. Securities Gilt Fund, and Kotak Gilt Investment.

    7.   Dynamic Bond Funds

    These funds invest in debt securities with different maturity periods and actively manage the fund’s interest rate risk. Returns vary based on market conditions. Above mentioned are some of the types of debt mutual funds. There are various other types, which we shall discuss later. The best Dynamic Bond funds to invest in India are ABSL Dynamic Bond Fund, ICICI All Seasons Bond Dir, HDFC Dynamic Debt, and 360 ONE Dynamic Bond.

    8. Monthly Income Plans (MIPs)

    MIPs are hybrid schemes that invest in a mixture of debt and equity. However, the allocation in equity is about 15-20% only. These funds offer regular income in the form of dividend payouts. However, you don’t need to receive dividend payments because it is at the discretion of the AMCs and depends on the surplus left from realized gains.

    Taxation of Debt in India

    Tax in debt is divided into two parts.

    Short-term gain and long-term gain where the short-term duration is less than three years as per your income tax slab, and for long-term, it is more than three years at the rate of 20% with indexation benefit. (Indexation- means adjusting your purchase cost based on inflation). Now let us go through the advantages and disadvantages of investing in debt funds before jumping to any conclusion as to why to choose debt funds.

    Advantages of Investing in Debt Funds

    1. Stability & Safety

    Debt Funds invest in fixed-income securities, which are stable and safe compared to other investment options like stocks.

    2. Regular Income

    Debt securities like MIPs and FMPs help the investor receive regular income through interest payments.

    3. Diversification

    With the help of debt funds, investors’ exposure to risk is reduced because debt funds generally have less exposure to equities, reducing the portfolio’s overall risk.

    4. Tax Efficiency

    If you want an escape from taxes, debt funds can be a solution because these funds carry more tax efficiency than any other traditional investment option like FDs and post office schemes. FMPs can offer investors tax advantages because of indexation benefits.

    5. Liquidity

    Debt funds are generally more liquid than FDs. Investors can buy or sell these funds on any business day, providing liquidity when needed, and these funds do not have any lock-in period. However, they do carry minimal exit load in some funds.

    Read Also: Why Debt Funds Are Better Than Fixed Deposits of Banks?

    Conclusion

    CONCLUSION

    Debt mutual funds play a vital role in an investor’s portfolio by providing a range of fixed-income investment options. These funds offer stability, regular income, and diversification by investing in various debt instruments. The choice of debt funds depends upon factors like risk appetite, investment horizon, and financial goals. But it would help if you remember that debt funds are not entirely risk-free. Investors should consider consulting a financial advisor for personalized advice.

    Frequently Answered Questions (FAQs)

    1. What are debt mutual Funds?

      Debt mutual fund is a category of mutual fund that invests in fixed-income instruments such as Corporate and Government bonds.

    2. What are the different types of debt funds?

      Different types of debt mutual funds include short-term funds, Fixed maturity period funds, gilt funds, credit risk funds, etc.

    3. What is the taxation rate on long-term capital gains in debt mutual funds?

      The tax rate on debt mutual funds for the long-term is more than 3 years at 20% with an indexation benefit.

    4. What are T-bills?

      T-bills are treasury bills that the Government of India issues to meet short-term financial needs.

    5. What is the complete form of MIPs?

      MIP stands for monthly income plan.

  • Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

    Mutual Funds: Meaning, Types, Features, Benefits and How They Work.

    In the last 10 years, the mutual fund industry in India has experienced a growth of ₹ 40,00,000 crore in the value of AUM (Assets Under Management). It implies that India is unleashing the full potential of mutual funds to grow their money. Investing directly in the stock market can be an overwhelming task. Thus, investing in mutual funds offers a more straightforward way to create long-term wealth.

    quick summary of mutual funds

    Understanding What are Mutual Funds

    As stated earlier, mutual funds pool the money from small investors and invest them in the securities of other companies listed on the stock exchange. Investment holders share the income earned through these investments of interest and dividends with the capital gains benefits. Thus, a  mutual fund is the most suitable form of investment for the common man, as it allows them to diversify and invest in a more professionally managed security basket, without them being actively involved.

    Mutual Funds as a concept first originated in Britain in the 19th century but developed in the U.S. in the late 19th and early 20th century at the principal money centres of the North-East. These funds were primarily close-ended and used to finance growth in the U.S.A. after the Civil War. However, the crash of stock markets in 1929 led to the demise of these close-ended funds. In 1940, the U.S. had about 68 funds; currently, there are several thousands of schemes. More significantly, in the year 1965 only 2 to 3% of U.S. households, owned fund shares. Nearly one-fourth of all U.S. households invest today in Mutual Funds.

    The Indian mutual fund industry began with the formation of Unit Trust of India (UTI) in 1963 with the introduction of its first biggest scheme ‘Unit Scheme ’64’. The UTI then introduced several schemes for different sections of people. The public sector monolith operated under monopoly conditions and in an over-regulated economy till the mid-eighties. In 1987, commercial banks and insurance companies were also permitted to launch schemes.

    Read Also: Types of Mutual Funds in India

    Features of Mutual Funds

    Professional management

    Mutual funds are managed by professional experts, who are experienced in their respective fields. It gives the investor a sense of satisfaction that their hard-earned money is in good hands. These professionals are highly skilled and know when to enter and exit the market and accordingly churn the portfolio depending on the market dynamics.

    Diversification

    Mutual Funds let you invest in a more diversified portfolio without setting in much time. The main idea behind diversification is the simple reason given by the investor Mr. Warren Buffet, that never put all your eggs in one basket. Diversification helps to lower the risk of the investor. Diversification in mutual funds is done based on the objectives of the investors.

    Liquidity

    The liquidity of any asset shows how quickly it can be converted into cash. Assets that take less time to convert are highly liquid and the assets which take more time to convert into cash are less liquid. Mutual funds allow the investors to withdraw their money anytime until there are some restrictions by selling them at the current NPV.

    Time-Saving

    People who want to grow their money but do not have time to be actively indulged in the financial markets invest in mutual funds. Since mutual funds are managed by professionals investors do not have to spend their time researching every single company they want to invest in.

    Types of Mutual Funds

    There are various types of mutual funds present in the market. A person can invest in diverse mutual funds depending upon their needs. Mutual Funds could be differentiated based on their structure, choice of asset class and financial goals. Let’s try to understand each one of them one by one.

    Based on the choice of the asset class

    1. Equity Mutual Funds

    Equity Mutual Funds are the one wherein the pooled money of the investors are invested in different companies listed on the stock exchange. They are expected to yield more returns as compared to debt and hybrid funds. Therefore, the risk associated with them is also higher. The investment holders earn through dividends and capital gains in Equity mutual funds.

    2. Debt Mutual Funds

    When the pooled money of the investors is invested in the debt securities of the company they are called debt mutual funds. Debt mutual funds are suitable for investors who do not want to bear high risk and want consistent returns. Investors earn an interest income on them and also capital gains.

    3. Hybrid Mutual Funds

    Hybrid mutual funds are a mix of both debt and equity funds. The money of the investors is invested in such a way that they could earn higher returns compared to debt funds & the risk involved is less than the equity funds.

    Based on the Financial Goal 

    1. Growth Mutual Funds

    When the majority amount of the investor’s money is invested in growth companies or equity funds, they are called growth mutual funds. The investor should have a high-risk tolerance to invest in growth mutual funds.

    2. Income Mutual Funds

    People who want a consistent stream of passive income generally invest in Income mutual funds. Funds that fall under this category generally invest in securities like bonds, corporate debentures and Government securities. 

    3. Balance Mutual Funds

    Investing in balanced mutual funds provides the best of both worlds. The basic objective of the portfolio manager handling balanced Mutual funds is to provide the investors with a steady income flow along with growth. 

    Based on their structure

    1. Open-ended Mutual funds

    Open-ended mutual funds do not have any kind of restrictions over them. Restrictions could be the number of units sold, or having a maturity date. Open-ended funds are very flexible and allow the investors to exit anytime at the given NPV. 

    2. Close-ended Mutual Funds

    Close-ended mutual funds have some restrictions over them like no repurchase facility and a pre-defined maturity period. With all the restrictions they have lost their significance among the investors and now are hardly in any use.

    Benefits of investing in Mutual Funds

    Convenience

    Mutual funds are a convenient form of investing. You can start investing in mutual funds with as little as Rs.500 per month through an SIP investment. You can invest in mutual funds depending upon your convenience. Investing in mutual funds can be done through either SIP or lumpsum investment. 

    Financial discipline

    It is very important to have financial discipline nowadays. Because today life is more unpredictable than ever before. Everyone wants to give a secure future to their loved ones and investing in mutual funds is one way of doing it. Doing early financial planning not only helps oneself but also ensures a secure future for the people who are dependent on you.

    Low-cost

    Since so many investors pool their money to invest in mutual funds, therefore, the cost of mutual funds per investor comes out to be less. The expense ratio of managing mutual funds is also less as compared to when an investor invests his money directly into the markets.

    Reliability

    Mutual funds are very reliable as they are watched by the regulatory body SEBI (Security Exchange Board of India). There are various mutual funds present in the market like the ICICI prudential mutual fund, SBI mutual fund, HDFC mutual fund etc. 

    How do Mutual Funds work?

    • First, many small investors come together who share a common financial objective. The objective could be, investing in growth funds or having a regular source of passive income.
    • Then, these small investors pool their funds together.
    • After that, these funds are transferred to the portfolio manager who will manage these funds.
    • He will then invest these funds in various financial securities depending upon the financial expectations of the investors.
    • After investing, the portfolio manager analyses how the investments are performing and accordingly sells and buys the new and existing mutual fund units.
    • Then, the returns generated on investments are returned to the investors.
    • Bonus tip mutual fund units are deposited in the investor’s Demat account. Open your Demat account today with Pocketful.

    Read Also: Debt Mutual Funds: Meaning, Types and Features

    Conclusion

    Thus, after reading the above article, you must be clear that investing in mutual funds is a simple and easy way to invest your money in the stock market. Investing in mutual funds lets you experience the massive potential of the stock market without devoting much time to it. But one thing that you should keep in mind is that investing in mutual funds is subject to market risk so invest accordingly. As stock market is highly volatile and reacts aggressively to market news. 

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    FAQs (Frequently Asked Questions)

    1. How to invest in mutual funds?

      To invest in a mutual fund, you need to have a demat account. Open your Demat account today using Pocketful.

    2. What is NAV in mutual funds?

      NAV stands for Net Asset Value in mutual funds. It tells about the performance of the mutual funds.

    3. What is SIP in Mutual Fund?

      SIP in mutual funds is a way of investing in mutual funds. Wherein you invest a small amount regularly in mutual funds.

    4. Can I invest Rs. 2000 in mutual funds?

      Yes, you can invest Rs.2000 in mutual funds using SIP.

    5. What are Tax-saving mutual funds?

      ELSS is an example of a Tax-saving mutual fund. Tax saving mutual fund is like any other regular mutual fund with added tax advantage.

    • Open Free Demat Account

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