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Debt Funds

What is a debt fund?

Debt funds are mutual funds which invest in fixed income securities such as bonds, money market instruments (treasury bills, government bonds, non-convertible debentures) or even a combination of the two.

A debt fund which invests in money market instruments is called a liquid fund. A liquid fund ensures that the principal amounts you have invested are safe. It also gives a decent return as its earnings are from interest.

Why invest in Debt Funds
Safer than Equity

Safer than Equity

Investments in debt funds are not affected by volatility in the stock market. This reduces risk in your investment.

Stable Returns

Stable Returns

You get lesser but more stable returns, than equity. You replace volatility with stability. Debt funds are more liquid than fixed deposits.

Flexibility

Flexibility

You can invest small amounts regularly through the SIP route. Whenever you have extra money, you can invest it in debt funds.

Taxation Benefit

Taxation Benefit

The profit you make in the long term is taxed with an indexation benefit. You save on your taxes.

Types of Debt Funds

Fixed Maturity Plans

Fixed maturity plans are closed ended and invest in debt which matches the term of the scheme.

Fixed maturity plans have tenures ranging from 3 months to 5 years. You must invest in a Fixed maturity plan which matches your financial goals.

Income Funds

Income funds invest in Government bonds, securities and even corporate debentures. They invest across a wide range of maturities. They invest in short term instruments of 1-2 years and also in long term instruments of 10-15 years.

Short Term Fund

They invest in debt such as bonds, commercial paper and certificates of deposit with a maturity of 3-6 months.

Taxation of Debt Schemes

Short term capital gains (gains under 3 years), are added to your taxable salary. Taxed as per income tax slab you fall under. Long term capital gains (gains over 3 years), are taxed at 20% with indexation.

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