When and why should you invest in Debt Mutual Funds?

India Infoline News Service | Mumbai | August 20, 2015 23:49 IST

Debt mutual funds safety is measured from their investment portfolio. With systematic analysis, investors can choose debt mutual funds, which carry a low credit risk and comes with high credit rating.

Equity mutual funds remain as one of the best investment option for investors with long term horizon. There are some instances where investment in equity is not considered as an ideal asset class. These cases are:
  • The time horizon is less than five years,
  • The investors do not want to deal with volatility of the equity markets.
  • Anyone who belongs to any of these categories looks to invest in debt mutual funds or Bank
 
Fixed Deposits. Let us consider both the options in this article:
 
Safety of Capital
Fixed Deposits have high safety of capital. There is very low probability of losing the invested money. It is assumed that bank’s fixed deposits are guaranteed by the government. However, it should be clear that government backs the fixed deposits only to the limit of Rs 1 lakh.
 
Debt mutual funds safety is measured from their investment portfolio. With systematic analysis, investors can choose debt mutual funds, which carry a low credit risk and comes with high credit rating.
 
Returns
An investment done in a bank fixed deposit offer assured returns. As of now, the return percentage is in the range of 8% to 9%. The returns are more or less same on the debt funds, but they are not guaranteed. Due to fluctuations in interest rates, there can be some volatility in debt mutual funds.
 
Tax aspect
When it comes to tax factor, taxes considerably affect return from fixed deposits. The income earned from debt funds and bank fixed deposit is categorized differently. Investors get interest from fixed deposit while debt funds provide dividend or capital appreciation. The income from fixed deposits is taxable, while debt mutual funds have low tax impact after one year.
 
Withdrawal
An investor has to pay penalty if he wants to withdraw the fixed deposit amount before maturity. However, in case of debt mutual funds, investors have full liquidity for their investments. Some debt funds charge an exit load if the amount is withdrawn within a certain period of time. 
 

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