Debt funds are mutual funds that invest in fixed income securities. A debt fund may invest in bonds, securitized products, money market instruments or floating rate debt or other similar instruments.
Gilt funds, monthly income plans, liquid funds, fixed maturity plans, etc. are some of the investment options available to investors that can be classified under the category of debt funds. A debt fund is at lower risk as compared to equity fund.
Who are they suitable for?
Debt funds can be preferred if you are an individual who is not willing to invest in the equity market, which can be volatile. Investing in debt funds can prove to be useful to you during periods of high market volatility and uncertainty, as dividend* option can add to your cash flows. Furthermore, they could provide a good rate of returns.
Hence, debt funds could be a suitable option for individuals with low risk appetite. Debt funds are also suitable for individuals who are nearing retirement age and have accumulated a corpus that they wish to earn returns on, yet do not have the capacity to take on risks.
Risks associated with debt funds
It is important to remember that debt funds are not risk-free. They are subject to various risks such as interest rate risk, liquidity risk, credit risk, etc. It is important that you carry out thorough market research as well as due diligence about the underlying securities in the fund before making any investments.
As per prevailing tax laws for FY17, debt funds are subject to taxation as per your income slab in case you redeem the fund units within a period of three years, and a rate of 20% with indexation if you redeem the units after three years.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
*Dividends are subject to availability of distributable surplus and approval of Trustees. It should be noted that pursuant to payment of dividend, the NAV of the plan/dividend option of the Scheme would fall to the extent of dividend payout and statutory levy, if any.