Debt Mutual Funds

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Debt Mutual Funds mainly invest in a mix of debt or fixed income securities such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons. Generally, debt securities have a fixed maturity date & pay a fixed rate of interest.

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What are Debt Mutual Funds

There are different types of Mutual Funds that invest in various securities, depending on their investment strategy.

Debt Mutual Funds mainly invest in a mix of debt or fixed income securities such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons. Generally, debt securities have a fixed maturity date & pay a fixed rate of interest.

The returns of a debt mutual fund comprises of -

  • Interest income

  • Capital appreciation / depreciation in the value of the security due to changes in market dynamics

Debt securities are also assigned a 'credit rating', which helps assess the ability of the issuer of the securities / bonds to pay back their debt, over a certain period of time. These ratings are issued by independent rating organisations such as CARE, CRISIL, FITCH, Brickwork and ICRA. Ratings are one amongst various criteria used by Fund houses to evaluate the credit worthiness of issuers of fixed income securities.

There is a wide range of fixed income or Debt Mutual Funds available to suit the needs of different investors, based on their.

Benefits of Investing in Debt Mutual Funds.

The various benefits of investing in Debt Mutual Funds are listed below -

Your investments are not affected by equity market volatility
Debt Mutual Funds invest in a range of interest bearing instruments such as Treasury Bills, Government Securities, Corporate Bonds, Money Market Instruments and other debt securities.

Add stability to your investment portfolio
As Debt Mutual Funds mainly invest in debt securities, they are relatively more stable than equity investments. They can also lend stability to your equity portfolio by reducing the risk associated with your complete investment portfolio.

Freedom to withdraw your money when required.
All open ended mutual funds give you the freedom to withdraw your money as and when required, although your investments may be subject to an exit load. Close ended mutual funds have a defined maturity date. Such funds are listed and can be traded on the stock exchange.

You can aim for better post tax returns.
Earnings from debt instruments can come in two forms:

  • Dividend or interest payments

  • Capital gains based on the difference between the purchase price and the sale price of the debt security Tax on dividend / interest income : Dividend distribution Tax (DDT) is broken up into the following

  • Dividend for individual v/s non-individual investors and

  • Dividend from liquid v/s non-liquid funds

    The tax rates proposed in the Union Budget FY 2013-14 are as per the table below -

    Liquid Funds Non-Liquid Funds
    Individual Investor / HUF 25% + 10% Surcharge*+ 3% Cess 12.5%** /25%# + 10% Surcharge* + 3% Cess
    Non-individual Investor 30% + 10% Surcharge* + 3% Cess 30% + 10% Surcharge* + 3% Cess
    * With effect from 01st April 2013
    ** Existing rate applicable till 31st May 2013
    # With effect from 01st June 2013


    Tax on capital gains: Capital gains tax are broken up and taxed as follows -

  • Short term capital gains (not exceeding 12 months) – Marginal Tax Rate

  • Long term capital gains (exceeding 12 months) – Indexed Tax Rate (Except for NRIs / QFIs incase of Unlisted Mutual Fund units, where indexation benefit will not be available)
Indexation Benefit

Indexation adjust the purchase value of your investment to indicate the impact of inflation, while calculating long term capital gains tax for investments held for over 1 year.

How to Choose a Debt Mutual Fund scheme?

  1. Ask yourself the following questions Before deciding in which Debt mutual fund product to invest, it's important that you answer the following questions -
    • What is my investment objective?

    • What is my investment horizon?

    • How much risk am I willing to take?

  1. 2.Understand the Market Environment Keep in mind that you must also consider various market factors such as -
    • Would interest rates rise in the near term?

    • How are the interest rates likely to move over the next few years?
      As you may not be able to answer these questions yourself, you should seek advice from your distributor or keep yourself abreast with information available on the Market Reports section on our website.

  1. 3.Assess you current Asset Allocation
    It is also important for you to consider your overall asset allocation, the ratio of equity to debt in your complete investment portfolio, while deciding where to invest. Maintaining a good balance between equity and debt investments is essential to provide stability and the potential for growth in the long run

  1. 4.Identify the Type of fund that suits your needs
    Depending on how you answer the questions above, you could seek assistance from your distributor to select an appropriate fund to match your needs. Click on the link below to understand what points you need to consider before investing in a Debt Mutual Fund.