One of the most popular kind of mutual funds, debt mutual funds, are invested in securities that offer a fixed income such as corporate and government bonds, treasury bills, and money market instruments.
Why Choose Debt Mutual Funds?
When you are looking to diversify your portfolio and take on a lower risk, adding debt mutual funds is a good move. These funds offer a fixed rate of interest income and capital appreciation as per the performance of the market. Though the returns aren’t guaranteed, they are more predictable and stable than equity funds or direct equity investments.
What Kind Of Debt Mutual Fund Should You Choose?
Every issuer offers a range of debt funds that come with a fixed long or short-term tenor. They include:
- Liquid Funds that offer maximum liquidity and can be invested for a short tenor
- Ultra Short Term Funds come in handy if your investment horizon is less than 1 year
- Floating Rate Funds gives you access to variable interest rates subject to market dynamics
- Short Term & Medium Term Income Funds come with a maturity tenor of up to 3 years
- Income and Gilt Funds are high-risk high-gain funds that efficiently park your funds in a basket of securities
Apart from these common variants, most issuers offer a few more variants such as corporate bonds and hybrid funds that carry a little more risk.
What Is The Tax Implication On Debt Funds?
Your dividend earnings from debt funds do not attract any tax deduction. However, if you distribute or reinvest it then you need to pay a dividend distribution tax of 29.12% on it. Moreover, if you hold a debt fund for at least 3 years then your earnings are considered long term gains attracting 20% tax deduction after indexation.
BankBazaar.com is a leading online marketplace in India that helps consumers compare and apply for credit card, personal loan, home loan, car loan, and insurance.