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 IncomeThis 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 MovementsThe 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 SpreadsCredit 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.
Debt Funds are a type of mutual fund schemes that invests primarily in fixed income securities, which tend to provide regular interest income and reflect relatively lower volatility than other asset classes. Debt Funds can further be classified into different sub-categories as Overnight and Liquid Funds, Gilt Funds, Duration Funds, Credit Opportunities Funds.
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