One, check the average maturity of the fund’s portfolio as this has a bearing on your returns. So, when picking a fund, watch out for a few things. Look at a fund’s portfolio composition will give you an idea of the expected returns, risks and liquidity. Remember, it is the asset allocation (government securities, corporate debt and marketable securities) that largely determines how a debt fund’s NAV will move. Debt Funds can also be used for portfolio de-risking when you are nearing your financial goals. Also, a debt fund can be used in the overall portfolio for diversification acrossĪsset classes. If, however, you are the living on-the-edge type, then six months’ salary might suffice.įor those planning to buy a home after 2-3 years, investing in a combination of both long- and short-term debt funds might be a good idea. If you are the risk-averse type, then you might prefer a large fund of, say, a year’s salary. The amount you save for an emergency depends ultimately on what makes you comfortable. Those in their 20s and 30s might need more, so garner funds for about six months’ expenses, whereas those nearing retirement might not need much as they would have built Anything moreĬan actually affect your investment portfolio. Roughly the amount that gives you the confidence to combat emergencies in your household should be enough. For instance, if someone wants to park his emergency funds, he can go for liquid funds.Īs a thumb rule, 3-6 month’s household expenses can be one’s emergency fund depending on the age. Different types of investors invest in different types It depends on the requirement of investors. There’s no fixed rule as to who should invest in debt funds. In short, one should choose the appropriate option depending on the tax bracket. Growth option could be more tax-efficient. Hence, dividend payment or dividend reinvestment option gives better post-tax returns, to those who are in the highest tax bracket. Which indirectly decreases the net returns. Thus, debt funds can be a good alternative to investors for achieving their financial goals if they do not intend to bear risk involved in equity investments.Īs mentioned above, dividend from mutual funds is tax free in the hands of the investors, but the same is subject to Dividend Distribution Tax (currently 28.325 %), While long-term capital gains from debt funds are taxed at 10 per cent without indexation and 20 per cent with indexation, short-term capital gains taxes are levied according to the income-tax bracket one Debt funds also score on post-tax return.ĭividends from debt funds are exempt from tax in the hands of investors.The mutual fund, however, has to pay a Dividend Distribution Tax, which is currently 28.325 per cent in case of individuals or Hindu undividedįamilies. The debt instrument’s value, your fund’s NAV, too, would increase.Ī few major advantages of investing in debt funds are low cost structure, stable returns, high liquidity and reasonablesafety. To match this lower rate, there would be an increase in the prices your fund’s underlying instruments as they have a higher coupon (interest) rate. If the interest rate in the economy falls, new instruments issued in the Let’s assume, your debt fund owns a security that yields 10 % interest. Market prices of debt securities change with movements in interest rates. Its underlying assets and also on any upgrade or downgrade in the credit rating of its holdings. Thus, a debt scheme’s NAV also depends on the interest rates of If the interest payment is received, say, once every year, it is divided by 365 and the debt fund’s NAV goes up daily by this small amount. This interest income gets added to a debt fund on aĭaily basis. Of return, debt funds that earn regular interest from the fixed income instruments during the fund’s tenure are similar to bank fixed deposits that earn interest. Debt funds also receive periodic interest from the underlying debt instruments in which they invest. The difference between the cost and sale price accounts for the appreciation or depreciation in the fund’s net asset value (NAV). Debt funds invest in either listed or unlisted debt instruments, such as Corporate and Government Bonds at a certain price and later sell them at a margin.
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