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Things that You Need to Understand about Debt Mutual Funds

Things that You Need to Understand about Debt Mutual Funds

One of the most important cautionary lines that are known to blast an individual through the various forms of advertisements is that the mutual funds are always subject to huge market risks and it is the duty of the individual to read the various offer documents before investing carefully.

However, it is also true that most people do not pay heed to this particular statement even when they are reading, hearing, or watching a particular advertisement. It is crucial that you understand the nuts as well as the bolts associated with a debt mutual fund, which will make it easier for you to understand the risks that are there.

People are much more inclined towards traditional investment options like fixed deposits, time deposits, NSC, etc. An important aspect that is associated with investment and is normally sidelined is the debt mutual funds. They have a short-term, possess low risk, and also give back proper returns.

Given below is a list of the important features that you should know about the debt mutual funds.

The Low Risks Factor

Debt funds are undoubtedly the most significant as well as reliable investment options for the investors who have an appetite for low risks. Investors investing in the debt funds can be assured that they are not going to lose a huge amount of money. The return that an individual is going to get on a debt fund is not exactly as high in comparison to the equity funds but the factor of risk is extremely low.

The risk is only possible when the rates of interest are suddenly hiked, which is also one of the most remote possibilities. An inverse relationship exists between the rates of interest as well as the bond price. A debt fund will be affected by them, and it is normally reflected in the prices.

Free From Tax

The dividend that an investor receives from the debt fund is not only tax-free but it is also with the investor. Debt funds that are held for a period of 3 years or more are considered to be long term. This is why they are taxed at twenty percent after indexation. Indexation is responsible for taking inflation into the account and also reduces the total tax on the capital gains. TDS will not be deducted on the gains.

Debt Funds And The Two Types

Most people do not know that debt funds are of two types, which are completely dependent on the duration as well as the time of the purchase and sale. They are the open-ended funds and the closed-ended funds.

There are the open-ended schemes where the individuals have the freedom of selling or repurchasing units within a fund for a complete year, which are known as the open-ended funds. Open-ended funds include the short term funds, gilt funds, income funds, and MIPs.

Few of the schemes are closed-ended and in these kinds of schemes, individuals have the opportunity of investing only at the time of the NFO, during which the scheme closes for investment. This scheme is known to mature after a particular period and also, the liquidity of exiting is low.

The exit option that the investor has is selling the scheme in a stock exchange. Close-ended funds include the fixed maturity plans and the capital protection funds. According to www.forbes.com, businesses fail because of withstanding debts.

The Kinds Of Debt Funds On Basis Of Risks

The liquid fund is a low-risk fund. This fund is responsible for investing in the liquid money or securities that have the residual maturity of 91 days or less. Investors have the option of parking their money for a few days. This kind of a fund is responsible for offering a high marginal return in comparison to the bank deposits.

The ultra short-term fund is also a low-risk fund and it is known to invest in the debt securities of the short term along with a tiny portion in the debt securities of long term. Investors have the option of parking their money for almost a year.

The fixed maturity plans are considered to be the perfect alternative of fixed deposits for those investors who belong to the bracket of the higher tax. These are the close-ended funds that are known to invest in the debt instruments that have a maturity date, which is lower or equal to the date of this scheme.

The securities can be redeemed either on the maturity date or before it and the proceeds will be given to the respective investors. The returns are normally dependent on the rates that are prevailing in the current money market. To know more about investing in debt mutual funds, you can visit the reputed websites like toptenreviews.

Returns Linked To The Market

It is true that a debt fund seems to be extremely lucrative but you need to understand that they are not guaranteeing assured returns. They are volatile. A fund that is known to hold a short-term bond is not extremely volatile and is known to provide returns that are almost equal to the prevailing rate of interest.

A fund that is known to invest in the long-term bonds is considered to be sensitive to the changes associated with the rate of interest.

Transparency Of Investment

In the debt mutual funds, an investor is known to enjoy the facilities of receiving the portfolios in respect to the places where all their money is being invested monthly with the minimum cost. This has helped numerous investors to evaluate their choice of investing when a debt fund is considered.

Dividends

A debt mutual fund is known to provide the investors with the freedom of choosing their dividend. However, there is no guarantee in that.

Conclusion

Before making an investment in the debt mutual funds, it is crucial that you have proper knowledge about all the features that are associated with it. This is important because the investors should understand whether a debt mutual fund is a good opportunity for them, and on basis of that, they will be able to make their investments.

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