Debt Mutual Fund

When we buy a house loan from bank,

1. Bank provides us money
2. We need to return the money after fixed number of years
3. Bank charges a fixed interest rate for the money that it has lent

However, we also lend money to banks. In case of a fixed deposit, we lend money to the bank.

In FD’s, you would see a similar resemblance as that of a house loan:

1. You have lent money to the bank
2. Banks will return the money after fixed period
3. Bank will provide you a fixed interest after a specified period

Therefore, FD is a debt instrument where you receive a periodical amount of interest for a specified period.

What are debt mutual funds ?

Debt mutual funds participate in secondary bond market where they trade government bonds, corporate bonds, public sector bonds anticipating risks like interest risk, credit risk etc…

What should I look for in debt mutual funds ?

There are mainly two things that you need to look for in debt mutual funds:

1. What kind of papers does the debt fund have ? Is it heavy on sovereign, AAA, AA funds? I would strongly recommend not to go for riskier debt funds as you already have equity funds for that.
2. Your investment horizon should match the maturity period of your debt fund.

I find that funds as stated below serves the purpose of retail investors :

1. Overnight Funds (maturity in 1 day)
2. Liquid Funds (maturity in 1 to 3 months)
3. Ultra-Short-Term Duration Funds (maturity in 3 to 6 months)
4. Low Duration Funds (maturity in 6 to 12 months)
5. Short Term Duration Funds (maturity in 1 to 3 years)

The returns do not fluctuate much based on interest rate.

Benefit of Debt Mutual Funds

There are multiple benefits of debt mutual funds

1. Tax is not deducted at source
2. If you keep the debt fund for a period of 3 years, you only need to pay a tax of 20% with indexation benefit
3. More likely than you know, debt funds gives better return than FD

Debt Mutual Funds - Recent Times

See the performance of debt mutual funds in the last 1 year.

In fact, in the recent times, there are few debt funds which have given much better return than equity funds.

Reference

1. Moneycontrol
2. Livemint

I would like to invest in Debt Mutual Fund!