Are Debt Funds Better Than Normal Savings?

Are Debt Funds Better Than Normal Savings? 

Debt funds are mutual funds where the investment is made in corporate and government bonds, treasury bills and corporate debt securities. They offer a steady return on the investment. Debt funds have emerged as popular investment instruments in recent years due to their low risk and consistent returns. 

Debt funds are gaining more takers among those who are looking for consistent growth and low risk for their investment. But, are these debt-based mutual funds better than regular savings? Relying on debt funds to build your future savings could be rewarding if you keep a few things in mind like the investment horizon, credit quality and interest rates among others before investing. A right mix of debt funds and conventional savings instruments in your portfolio could help you get a better return on your investment.

Low Risk

You should assess risk factors before investing in mutual funds. If you have a low risk appetite, investment in debt funds could be an ideal option. These funds come with low to medium risk depending on the kind of debt being held. Debt funds offer lower return compared to equity funds, but these classes of mutual funds get less affected by market volatility. So if you are looking for safety of your principal amount and a consistent return then go for the debt funds. Debt funds offer higher return than the fixed deposits and conventional savings.

Debt mutual funds also allow investors to invest in much safer credit instruments, from government securities to corporate bonds. Some debt mutual funds, called fixed income mutual funds, even provide investors with fixed cash flow through interest payments.

Liquidity and Investment Horizon

Contrary to the common perception, debt funds can be quite liquid and if invested in mutual funds through ETFs then extremely liquid. These mutual funds can be traded, sold or redeemed at any point. For instance, you can consider different fixed-income mutual funds offered by the Axis Bank like Axis Corporate Debt fund, Axis Banking and PSU Debt Fund, Axis GILT Fund, Axis Money Market Fund, Axis Short Term Direct Fund and Axis Overnight Fund among others.

These funds are suitable to meet your short-term financial goals and also fall in the low to moderate risk category. If you are looking for an investment period from one week to three years then debt funds could be ideal for you.

Tax Saving

You can save tax on your debt fund investments through a process called indexation, which is not allowed for other savings like fixed deposits or equity funds. Indexation is the process through which your tax liability on gains from mutual fund investment can be adjusted against the inflation rate. Redeeming or selling debt mutual funds after holding them for at least three years gives tax benefits. The tax on selling mutual funds after three years comes under the Long Term Capital Gains Tax (LTCG), which is fixed at 20 percent of appreciation.  

Conclusion

Debt funds are ideal for the investors who have a low risk appetite and want a regular return on their investments. If you are parking your money in bank accounts and fixed deposits then debt funds could offer you better return compared to these conventional savings. Though the debt funds are less volatile compared to equity funds, the investors need to consider credit risk, interest rate risk and liquidity risk before selecting a debt fund. The Net Asset Value (NAV) of mutual funds fluctuates with the change in interest rates and higher interest rates adversely impact it. So, you should choose Debt Funds based on your investment goals and risk assessment. Debt funds give stability to your portfolio and also most of these funds are managed by professionals, who try to get the best return possible. Debt Funds can’t be ignored if you are looking for relatively higher return, compared to savings in bank accounts and fixed deposits, with tax benefits.

[Disclaimer: Mutual Fund Investments are subject to market risks, read all scheme related documents carefully]

(Above mentioned article is a Consumer Connect Initiative, This article is a paid publication and does not have journalistic/editorial involvement of IDPL, and IDPL claims no responsibility whatsoever.)