Are debt funds worth it?
Earning higher returns than traditional instruments
Debt mutual fund investors will benefit
Investors who are planning to invest in the next financial year will not be benefitted much as bond yields' movement has already begun, not leaving much on the table for fresh investments." Bisen says, "Existing investors shall benefit more.
Liquidity: FDs often have a fixed tenure, and premature withdrawals may come with penalties. Debt MFs generally offer higher liquidity, allowing you to redeem your investment at any time. If you need flexibility and access to your funds, Debt MFs may be more suitable.
Investing in debt funds carries various types of risk. These risks include Credit risk, Interest rate risk, Inflation risk, reinvestment risk etc. But the key risks which needs be considered before investing in Debt funds are Credit Risk and Interest Rate Risk; Credit Risk (Default Risk):
Since interest rates movement are inversely proportional to the bond prices a higher long tenure bond yield means less funds would be deployed in lower tenure bonds and current rates fall.
While debt funds are generally considered safer than equity funds, they are not entirely risk-free. Factors like interest rate risk, credit risk, and liquidity risk can affect the performance of debt funds.
Debt funds are good for the short-term period however gold investments are good in the long term due to market fluctuations. Every investor should maintain a balance between both of the investments and include gold in their portfolios depending upon the term of investment and market fluctuation risk.”
1) DSP Credit Risk Direct Plan(G)
The DSP Credit Risk Direct Plan(G) has given an annualised 1-year returns of 17.18%. This fund is a mix of high yielding and lower-rated debt securities and it invests in debt instruments across different credit ratings, with at least 65% in AA and below rated securities.
Funds with higher exposure to long term debt can make strong capital gains when rates are falling, but could generate massive losses when rates are going up. In contrast, funds that invest mainly in short-term securities like money market debt or treasury bills have stable NAVs, but do not benefit from capital gains.
Short Duration Funds usually have lower default risk as compared to credit risk funds as these are mostly investment-grade securities and any investment in equities which is lower than 65% is not treated as equity but rather as a debt fund.
How long should you invest in debt funds?
| Investment horizon | Debt Fund Categories |
|---|---|
| Up to a year | Ultra Short Duration Funds |
| One to three years | Money Market Funds, Low Duration Fund, Short Duration Funds |
| Over three years | Corporate Bond Funds, Banking & PSU Funds |
Debt funds are also referred to as Fixed Income Funds or Bond Funds. A few major advantages of investing in debt funds are low cost structure, relatively stable returns, relatively high liquidity and reasonable safety.
Debt mutual funds offer lower returns than equity funds. Also, there is no guarantee of the returns. The NAV of such funds fluctuates with changes in the interest rate. If the interest rates rise, then the NAV of these funds falls and vice-versa.
While short-duration debt funds and RBI floating-rate bonds deliver decent returns, they can only marginally beat inflation.
The massive inflow in hybrid funds pushed the category's AUM to Rs 7.2 trillion in March 2024, a significant increase of 51 per cent from FY23. Overall, the mutual fund industry saw its AUM reach a record high of Rs 53.40 trillion in March 2024, reflecting a positive trend.
Q- Are debt funds tax-exempt? No, debt funds are not tax-exempt.
Debt might be considered bad if it's difficult to repay or doesn't offer long-term benefits—think loans with high interest rates or unfavorable repayment terms, for example. If you're considering taking on debt, it might help to consider what it could do to your debt-to-income (DTI) ratio.
- X = P x [{((1 + i)^n) - 1} / i] x (1 + i)
- X = The total amount you will receive at the end of the maturity period of the debt mutual fund.
- P = The amount invested in the form of monthly SIPs.
- n = Number of SIPs made.
- i = The fund's expected rate of return.
High-interest loans -- which could include payday loans or unsecured personal loans -- can be considered bad debt, as the high interest payments can be difficult for the borrower to pay back, often putting them in a worse financial situation.
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
Where is the safest place to put your money in a recession?
- Defensive sector stocks and funds.
- Dividend-paying large-cap stocks.
- Government bonds and top-rated corporate bonds.
- Treasury bonds.
- Gold.
- Real estate.
- Cash and cash equivalents.
You can keep money in a bank account during a recession and it will be safe through FDIC and NCUA deposit insurance. Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.
Two fund categories, Overnight Funds and Liquid Funds fall in this category. These are the safest funds in the debt category with negligible interest or credit risk.
HDFC Hybrid Debt Fund
This hybrid debt fund is considered as one of the best monthly income plans available in the market. In the last 5 years, the fund has given an average return of 9.76% and has given 10.44% of average return since its launch in the year 2003.
- Bond funds. ...
- Municipal bonds. ...
- High-yield bonds. ...
- Money market fund. ...
- Preferred stock. ...
- Corporate bonds. ...
- Certificates of deposit. ...
- Treasury securities.
