A debt fund offers predictability and stability to portfolios. This is because they invest in fixed income securities, such as corporate bonds, commercial papers, and government securities to reduce the risk margin to a great extent. This is a safe option for conservative investors as they help to stay afloat during difficult market situations.
There are plenty of other benefits of adding debt mutual funds to your profile. Understanding how it can help you achieve financial goals will let you make an informed decision. Have a look.
Ø Risk Reduction
Life circumstances change over time. So along with increasing age or decreasing income, risk appetite will decrease typically. Debt funds are an ideal choice here since they are less volatile.
Ø High Liquidity
Debt funds are an extremely liquid investment. You can withdraw whenever you wish to and convert it into cash or cash value. It starts to reflect in your account in a maximum of 1 day. There are no charges or penalties for pre-mature withdrawals. This is quite helpful during uncertain times like a pandemic. So, if you ever think of building a corpus for emergency needs, you could turn to debt mutual funds.
Ø Tax Efficient
If you are looking for tax saver mutual funds, an Equity-Linked Investment Scheme could be ideal. However, debt funds are also tax efficient when compared to other instruments. Short-term capital gains (STGC) tax is levied upon your taxable income only if you hold the fund for up to 3 years. This would be as per the existing tax slab. However, debt funds are mostly used for short-term goals. So, you might want to encash before without any extra charges. However, tax-saving should not be the sole pre-requisite for an investment.
Ø Flexibility
Debt funds can be modified as and when required. Investors can increase or decrease the amount by investing through SIP. This can be done to manage the different financial conditions through the tenure. In fact, you can also set up an SWP or Systematic Withdrawal Plan. This can help you make the best use of your funds. Your manager can also switch up the investment portfolio. However, this depends on the market situation.
Further, you can also add more funds in your portfolio when interest rates are dropping. This way can you can make the most of the falling rates.
Ø Regular Income
Debt funds indeed yield comparatively lesser income. But the good news is that it is regular and stable without uncertainties. You can earn interest income from such securities in your portfolio. This adds to growth in your corpus without having to worry about losing money to market collapse.
These tax saver mutual funds are for anyone with surplus funds who are risk-averse. In fact, these securities are also ideal if you prefer small and stable returns instead of excess capital appreciation. The good thing is no matter your financial priorities, or whether your focus in short-term or long-term goals, debt funds can help you in all regards.
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