Why You Should Invest In Debt Funds

Investors looking for regular returns with low risk tend to be drawn to fixed deposits as a means of investment. This is not surprising, since preset interest rates and recurring annual returns can be a tempting option, especially when considering the volatility of equity market investments. However, a middle ground exists between the tools of equity mutual funds and fixed deposits, which is the chief concern of debt funds. Debt funds are capable of generating an income for the investor in the short term, as opposed to long term wealth creation, which is the objective of investment in mutual funds. One of the reasons debt funds trump fixed deposits is that they are tax efficient. Debt funds are not subject to the policy of deducting taxes at source, and the tax levied on the income gained through debt funds is as little at 13%. This can be achieved by opting for what is known as dividend distribution, whereas income that is gained through fixed deposits is subject to a capital gains tax that can range from between 20 to 30%. Thus, overall one may find that debt funds provide 25% more post-taxation income than FDs. Debt funds are also highly liquid, which makes them ideal for investors to achieve short term financial goals. Unlike fixed deposits, which levy penalties on the investor if he or she chooses to withdraw any time before the maturity date, debt funds levy no penalties after the first month of depositing. To add to this, a huge advantage of debt funds is that they allow for partial withdrawals of the principal amount, which does not prove as detrimental to the investment. 'Breaking' an FD, on the other hand essentially eliminates an entire chunk of one's investment portfolio. Like every investment tool, there are multiple variants of the basic debt fund that potential investors can choose from. Actively managed funds are highly popular, as they relegate much of the strategic decision making process to the fund manager. A competent fund manager who takes appropriate calls on the duration and amounts of debt funds can work wonders for the investor's portfolio. Other variants include income funds and gilt funds, which cater to the more medium to long-term inclined investors. A healthy portfolio comprises a reasonable mix of high risk equity market investments, low risk fixed deposits or government bonds, and finally debt funds. Debt funds are ideal for both serious as well as amateur investors as they satisfy the objectives of both i.e. long-term profit as well as immediate returns.