WHAT ARE THE PROS AND CONS OF INVESTING IN A DEBT FUND?

What are Debt Funds?

Sometimes, debt funds are also referred to as fixed-income funds or bond funds; there are both long and short term debt funds that you can invest in. Often, people get confused between debt funds and equity mutual funds in the stock market. However, both of them are different; debt funds are way more secure than equity funds. They are managed by debt fund managers to ensure the safety of the money invested by you. 

Debt mutual funds in India or fixed-income funds are ideal for those investors who aim for regular investment minus the risk. These funds are less volatile, eliminating any investment market risk that other types of mutual funds may have. Debt funds are like the conventional fixed bank deposit; the only thing, debt funds have better returns with more tax benefits. When it comes to the working of debt funds, they are not entirely different from the other types of mutual funds. However, in terms of safety and security, debt funds score high. 

Debt funds have a plethora of advantages like low-cost structure, relatively stable returns, high liquidity, and so on. However, every good thing comes with disadvantages and so do debt funds. Now that you know the meaning of debt funds, let’s discuss in detail what are the advantages and cons of investing in debt funds. 

Debt Funds: Major Advantages of Investing in Them

Following are the benefits of debt funds that you should know of –

• Stability

Fixed income funds help in bringing stability to your investment portfolio. Because of this advantage, you can expect steady returns along with availing regular interest income by investing in the best debt funds.

• Liquidity

One of the biggest advantages of fixed income funds or debt mutual funds in India is relatively high liquidity. You can withdraw your debt fund at any given time and get the amount in your bank account in merely 24 hrs. Debt funds come in handy during urgent financial needs.

• Better Returns

Investing in the best debt funds in 2021 will help you gain higher returns, which are at least 4% - 5% more than what you can gain in normal savings bank and fixed deposit accounts.

• A Much Safer Option

As mentioned before, debt funds are a safe and secured investment option. This is the biggest advantage of both short term debt funds as well as the long terms ones. They are not affected by market risk; the transaction cost is also low.

• Taxation Benefits

Another benefit of debt funds is that they are not taxed every year. The tax is levied only if you withdraw the amount from the debt fund account; you can also enjoy the benefits of indexation and reduced tax amount on returns.

Debt Funds: Cons of Investing in Them

• Default in Paying Interest

Long or short term debt funds mostly include money market instruments, corporate deposits, and government securities where investors invest their money. Though the debt funds are safer and not subject to market risks; there can be a case when the institution where you invest can default in paying the interest rate of the debt fund.

• Plethora of Options

Wondering how this is a con? Well, there are so many fixed-income funds available in the market that it becomes very difficult to choose from. For new investors, it becomes confusing to choose the best debt funds for themselves.

• No Control over the Funds

As individual investors, you will have no control over the day-to-day activities of the debt funds. Because professional fund managers will be managing your funds and account.

Even with these cons, debt funds still stand to be one of the best investment options in India for a less-riskier investment with more returns.

At Muthoot Finance, we have financial experts to cater to your mutual fund investment needs as per your financial goals, be it debt or equity mutual funds. Visit your nearest Muthoot Finance branch to know more.