Debt funds can further be classified into different sub-categories as below
Overnight and Liquid Funds
Such funds invest in debt and money market securities with maturity of 1-91 days. These funds are suitable for parking short-term surplus funds.
Such funds invest in Government Securities (G-Secs). While the funds carry minimal credit risk with predominant investment in sovereign securities, the interest rate risk may be higher in gilt funds with relatively higher duration.
Credit Opportunities Funds
Such funds invest in companies with different credit ratings, thereby capitalising on the credit spreads across different credit profiles.
Debt Fund Returns
Since debt funds primarily invest in fixed income securities, accrual income for the interest on such securities
is the primary source of returns for the investors. Such income may be gauged through the fund's Yield to Maturity
Investors can know the prevailing YTM of the fund through the monthly fund factsheet disclosed by the mutual fund house. Apart from the interest income, debt funds may also generate returns when the interest rates decrease, or credit ratings improve. This is because fixed-rate securities' valuations in the investment portfolio increase during such cases.
Frequently asked questions
How to invest in Debt Funds?
The process of investing in debt fund scheme is the same as that for investing in any other mutual fund scheme. As such, one can invest in debt fund scheme through the website/ mobile application of the mutual fund house or physically submitting the application form at Official Points of Acceptance (POA). The investment transaction is processed at the NAV (Net Asset Value), which is disclosed by mutual funds on each business day.
What are the Benefits of investing in Debt Funds?
Stability of Income - The regular interest from investment in debt securities provides a stability of income for the investment portfolio.
Wide choice of funds - Investors enjoy the luxury to choose from a wide basket of debt funds, suiting different time horizons and risk profiles.
Convenience of Investing - Investments in debt funds can be made in lump sum or through Systematic Investment Plans (SIPs).
How do Debt Funds Work?
Debt Funds may generate income for investors through the following three modes:
Accrual Income This represents the accrual of interest income on debt securities in which the fund has invested. It gets factored in the valuation and NAV (Net Asset Value) daily.
Interest Rate Movements The valuation of debt securities gets impacted when the market interest rates change. If the interest rates fall, the valuations of such securities increase.
Movements in Credit Spreads Credit spreads refer to the risk premium, which the investors expect from an issuer company depending upon the expected credit risk (i.e., risk of default). As such, the improvement in credit risk for a particular issuer company results in the moderation of the credit spreads, leading to lower interest rates for the company.
Who Should Invest in Debt Funds?
Debt Funds create a portfolio of fixed income securities predominantly. Such funds, thus, may generate reasonable returns coupled with a stable portfolio. As such, the investors with reasonable return expectations and conservative to moderate risk profile may consider investing in debt fund schemes.
Taxation of Debt Funds
The taxation of debt funds is summarised as below:
|Particulars||Period of Holding||Tax rate|
Short Term Capital Gains (STCG)
Long Term Capital Gains(LTCG)
Less than 36 months
36 months or more
Regular tax rates applicable to the investor
20% with indexation benefit
|Dividend Income||Not applicable||Regular tax rates applicable to the investor|
If an investor receives a dividend of more than Rs. 5,000 in a year from the mutual fund, TDS @ 10% of such dividend income is also deducted by the mutual fund.
The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her or their own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws/finance bill 2020. Any action taken by you on the basis of the information contained herein is not intended as on offer or solicitation for the purchase and sales of any schemes of UTI mutual Fund. Please read the full details provided in SID and SIA carefully before taking any decision.