In debt funds, most of the money from investors is invested in fixed income securities and they are low-risk mutual funds. These instruments include government bonds (both central and state) corporate bonds, treasury bills, certificates of deposits, bonds issued by banks, etc. These are one of the best options for investment for investors with a low-risk appetite. The parameters that are essential while investing in debt funds are expense ratio, tracking the credit quality, average maturity, and assets under management (AUM). The total amount invested in a particular scheme by all investors is AUM.
Debt funds are not much impacted by market fluctuations and have a pre-defined maturity date, and according to experts, these funds have more or less expected returns. They are also diversified across various securities. Additionally, returns are higher than a bank savings account and FDs. Dept funds can be easily converted into cash because of their highly liquid nature.
The earnings from debt funds do not attract a deduction of taxes or TDS. The payment of taxes arises only when the investor withdraws the funds or sell them depending upon the period of investment debt funds have a low transaction cost compared to other mutual funds.
It is always confusing especially for new investors to choose the right funds to invest since various types of debt funds are available in the market. Debt funds need to be chosen depending upon the financial goals of the investor and how well the funds meet those goals.
Along with the evaluation of risk appetite, the interest rate trend, and investment horizon must be evaluated by the investor.
According to experts, short term debt funds are most suitable for investors who are looking to invest for a period of six months to 1 year. They are most ideal for creating an emergency fund. Short term debt funds or medium duration funds can be considered by investors depending upon the investment horizon.
Debt funds, even though are relatively safer than equity funds, are not entirely risk-free like bank fixed deposits. They carry credit risk, changes in interest rate, and lack of liquidity along with other risks.