Different types of Debt Mutual Funds

Nutan Gupta

05 Oct 2016

mutual funds

A Debt Fund is a mutual fund which invests in fixed income securities. Fixed income securities include government bonds, certificate of deposit, commercial papers, treasury bills and corporate bonds. Usually, investors who have a low-risk appetite and do not wish to invest in the equity market due its volatile nature consider investing in debt funds.

Gilt Funds

These debt mutual funds invest their corpus in government securities (G-secs). Since these are securities issued by the government, they do not carry any risk. However, gilt funds are highly vulnerable to interest rate risk. These funds have the tendency to lose some part of their net asset value (NAV) with any change in interest rates.

Income Funds

As the name suggests, income funds are those funds whose goal is to provide income from investments to its investors. The fund invests in debt instruments like government bonds and corporate bonds which offer dividends or interest payments.

Monthly Income Plans

In monthly income plans (MIPs), most of the corpus is invested in debt instruments and equity gets the least exposure (around 15-20%). Usually, MIPs are suitable for investors who have a big corpus and wish to generate a monthly income for themselves.

Short term funds

This is an investment option for investors who wish to invest for a shorter duration (3-6 months). These funds invest in short-term papers like Certificate of Deposit (CDs) and Commercial Papers (CPs).

Liquid Funds

Liquid funds are the one which are easily convertible into cash and provide preservation of capital. Investors with an investment horizon of one day to three months can park their money in liquid funds. Liquid funds invest in securities with a maturity period of up to 91 days. Highly liquid money market instruments include treasury bills, CPs, CDs etc. If an investor chooses to redeem his investment, the money gets credited to your bank account within 24 hours. An individual who wants to create a corpus for emergency funds can invest in liquid funds.

Why do people invest in debt Mutual funds?

  • A lot of people are not comfortable with the volatility that exists in the equity market and hence choose to invest in low-risk securities like debt funds.
  • When people have short-term goals which can be fulfilled in 4-5 years, debt funds prove to be a good investment option, as it provides capital protection.

Taxation on Debt Mutual funds

Long Term Capital Gain
( If units held for more than 36 months)
20% with indexation or 10% without
indexation
Short Term Capital Gain
( If units held for more than 36 months)
As per tax slab rates of the investor

In simple words, the longer an investor stays invested in a mutual fund, the higher is the indexation benefit.

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Different types of Debt Mutual Funds

by User Not Found | Oct 05, 2016
mutual funds

A Debt Fund is a mutual fund which invests in fixed income securities. Fixed income securities include government bonds, certificate of deposit, commercial papers, treasury bills and corporate bonds. Usually, investors who have a low-risk appetite and do not wish to invest in the equity market due its volatile nature consider investing in debt funds.

Gilt Funds

These debt mutual funds invest their corpus in government securities (G-secs). Since these are securities issued by the government, they do not carry any risk. However, gilt funds are highly vulnerable to interest rate risk. These funds have the tendency to lose some part of their net asset value (NAV) with any change in interest rates.

Income Funds

As the name suggests, income funds are those funds whose goal is to provide income from investments to its investors. The fund invests in debt instruments like government bonds and corporate bonds which offer dividends or interest payments.

Monthly Income Plans

In monthly income plans (MIPs), most of the corpus is invested in debt instruments and equity gets the least exposure (around 15-20%). Usually, MIPs are suitable for investors who have a big corpus and wish to generate a monthly income for themselves.

Short term funds

This is an investment option for investors who wish to invest for a shorter duration (3-6 months). These funds invest in short-term papers like Certificate of Deposit (CDs) and Commercial Papers (CPs).

Liquid Funds

Liquid funds are the one which are easily convertible into cash and provide preservation of capital. Investors with an investment horizon of one day to three months can park their money in liquid funds. Liquid funds invest in securities with a maturity period of up to 91 days. Highly liquid money market instruments include treasury bills, CPs, CDs etc. If an investor chooses to redeem his investment, the money gets credited to your bank account within 24 hours. An individual who wants to create a corpus for emergency funds can invest in liquid funds.

Why do people invest in debt Mutual funds?

  • A lot of people are not comfortable with the volatility that exists in the equity market and hence choose to invest in low-risk securities like debt funds.
  • When people have short-term goals which can be fulfilled in 4-5 years, debt funds prove to be a good investment option, as it provides capital protection.

Taxation on Debt Mutual funds

Long Term Capital Gain
( If units held for more than 36 months)
20% with indexation or 10% without
indexation
Short Term Capital Gain
( If units held for more than 36 months)
As per tax slab rates of the investor

In simple words, the longer an investor stays invested in a mutual fund, the higher is the indexation benefit.

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