Debt Funds Meaning, Types, Returns and Taxation

, , Leave a comment

Debt funds meaning

Debt funds invest in bonds and securities to generate wealth in the long term. It is a safer investment option than equity funds. It can deliver steady returns in long terms.

Debt funds types

Debt funds can be classified into the following categories.

  • Liquid Funds: These are generally risk-free. Moreover, it provides greater liquidity and better returns than fixed deposit accounts.
  • Short term and Ultra short term funds: These are investment ideal for short term investment. The maturity of such funds generally ranges from 3 months to 3 years.
  • Overnight fund: These are one-day investment option. It is almost risk-free but has a low return.
  • Credit Risk funds: It is ideal for an investment of 3 years to 5 years. These funds are riskier than other debt funds. Hence, there may be defaulters and you may lose your invested money.
  • Gilt Fund: It is one of the safest debt funds. It invest in highly secured Government funds. Hence, it has very low risk involved.
  • Corporate funds: It invests in securities issued by corporate companies. It is ideal for an investment of 1 year to 3 years.

Top 5 debt funds 2020

The top 5 debt funds of 2020 are:

  • DSP Government Securities Fund – Regular Plan – Growth
  • Reliance Income Fund – Growth Plan
  • Edelweiss Government Securities Fund Regular Growth
  • L&T Triple Ace Bond Fund Growth
  • Aditya Birla Sun Life Floating Rate Fund Regular Plan Growth

Debt funds vs FD

Debt funds are known to be a better investment option than Fixed deposit for the following reasons.

  • Better returns: Debt funds can deliver higher returns than fixed deposit accounts.
  • Greater liquidity: Short term debt funds provide more liquidity to the investor.
  • Flexibility and Transparency: Unlike fixed deposits, debt funds give you the transparency to know where your money is invested. Moreover, you can flexibly choose where to invest.

However, considering the risk factor, a fixed deposit gets preference to debt funds.

How to invest in debt funds?

  • Choose the debt funds to invest in based on the risk profile and term of the investment.
  • Find a fund manager. There are several fund managers online and offline.
  • Do the paperwork required.
  • Invest in your desired debt funds.

Debt funds taxation

Capital gains on debt funds are taxable

  • If the investment is withdrawn before 1 year, the capital gains are taxed on the Short Term Capital Gain (STCG) rate.
  • If the investor stay invested in debt funds for more than a year, the capital gains are taxed at Long Term Capital Gain (LTCG) rate. LTCG rate is generally lower than the income tax rate.

Can debt funds give negative returns?

Debt Funds are generally safer than equity funds.

  • It can be considered as almost risk-free. However, since these funds are a market-linked investment, there is a chance of negative returns.
  • If the investor withdraws before the maturity date, it may lead to negative returns as well.

Leave a Reply