What is Debt Mutual Fund? Benefits of Investing

Q: What is a Debt mutual fund?

Ans: Debt means loan. Yes, so u guessed it right, in Debt mutual funds the fund manager gives your invested money to Government, businesses and financial houses. So why do they take money from mutual funds and what is the guarantee given in return? The government takes the money to meet the expense of developing the nation when the taxpayer's money is not enough to pay the bill.

      Mutual funds give money to the government in two types:

Treasury bills- This bills are auctioned by RBI at a regular interval. Treasury bills are the safe mode for the mutual fund's house to keep the surplus money. The risk value is less and the government offers a discount on face value. It has a loan period of less than one year.

Bonds- It is a security issued by a company, government or financial institutions which gives a regular or fixed payment of interest in return for borrowed money for a certain period of time. 

      ---Businesses takes money from Mutual funds in two types:

Corporate Bonds- It is a debt security issued by the corporates to the investors. The money taken will be returned depending on the future operations of the company. Companies physical assets can also be used as collateral for bonds. 

Commercial papers- It is a type of unsecured debt-type instrument issued while taking money from the investors. The maturity period of this bond is not more than nine months.

 

       --- Financial Institutions takes money from Mutual funds in two types:

Certificate of Deposit- It is a certificate of fixed deposit with specified maturity and fixed interest rate. 

Perpetual Bonds- It is a bond with no maturity date and the principal amount is never repaid, only the interest on the principal amount is paid to the investors.

Benefits of Debt Mutual Funds: 

Investors money is diversified- The money that you invest in debt mutual funds are invested in a different sector of debt funds, which decreases the risk of loss of the investor's money. Minimum Rs.500 can be invested in debt funds.

Your investment is handled by professionals- Every fund house has a fund manager with a team of professionals who studies the market continuously. This ensures the safety of your investments. 

Tax benefits- If you withdraw your investment before three years then you have to pay the taxation amount on your investment according to your tax slab. If you withdraw the investment after three years then you have to pay a tax of 20%, but due to indexation, your effective tax will be much less. (Indexation is a technique which adjusts the tax amount according to the inflation).

Well regulated investment house- All the mutual fund's house are registered under the SEBI and regulated under strict norms. Everyday NAV values are sent to the investors to maintain transparency in the industry.

Liquidity- In the open-ended scheme, you can sell a particular portion or all the assets based on your needs. But in a close-ended scheme, it's hard to sell it again in the market.

Types of debt funds:

1 to 90 days- For this time period, you can invest in liquid and money market funds. they give better or equal to the savings account. They are invested in government securities which comes with a maturity period of three months. 

3 to 6 months- For this time period, you can invest in ultra short term funds. They invest money in treasury bills and commercial papers. 

6 to 12 months- For this time period, you can invest in short term funds. In the short term, the money is invested in commercial papers, commercial deposits and corporate bonds.

1 to 3 years- You can invest your money in medium-term funds. They invest the money in commercial papers, commercial deposits, corporate bonds, and debentures.

More than 3 years-You can invest in long term funds. They invest the money in Corporate bonds, Government securities, and debentures.

#All this data is based on mutual funds past performance please be careful before you invest your hard earned money.

!! Please share and subscribe to my blog for more information regarding mutual funds !!