It is designed to provide you with a regular income stream, capital preservation and lower risk as compared to equity funds. One of the basic motives of debt funds is to generate steady returns through interest income and capital appreciation from the underlying fixed-income securities.
Approximately 18 funds offered double-digit returns during the same period. Aditya Birla SL Credit Risk Fund delivered a 12.13% return in the past year. HDFC Long Duration Debt Fund and SBI Long Duration Fund provided returns of 11.91% and 11.74%, respectively, over the last year.
Can debt funds give negative returns? Debt funds can experience negative returns due to interest rate fluctuations. Funds with longer maturities are particularly susceptible to interest rate risks.
However, investment in a dynamic bond fund for an equal tenure will offer higher returns than the bank FD. Investors also have the option of a Monthly Income Plan if they want monthly payouts akin to interest on FDs.
They stay away from debt.
Car payments, student loans, same-as-cash financing plans—these just aren't part of their vocabulary. That's why they win with money. They don't owe anything to the bank, so every dollar they earn stays with them to spend, save and give! Debt is the biggest obstacle to building wealth.
The Pradhan Mantri Vaya Vandana Yojana (PMVVY)
The plan provides a fixed rate of return of 7.4% per year for ten consecutive years. One of the best options for risk-averse investors to get ₹10,000 per month as a pension is investing in the PMVVY scheme.
Some of the major risks in these instruments/funds are: 1) Interest risk- This is also known as price risk. Whenever there is a change is the interest rates the price of a debt instrument also changes.
Unlike Equity Funds, Debt Funds are considered low risk and are ideal for conservative investors seeking stable returns. They offer liquidity, ease of investment and diversification across various debt instruments. However, Debt Funds are subject to interest rates and credit risk.
However, if you opt for regular FDs, you may have to pay the penalty for early withdrawal. Conversely, debt funds impose no exit loads after a certain period. Therefore, debt funds provide greater liquidity and can be more cost-effective than Bank FDs. Debt funds typically yield higher returns than fixed deposits.
Overnight Funds
These overnight instruments are backed by collateral which comprises of Government Securities, and so these funds also have no credit risk. These are the safest debt funds but their yield is usually also the lowest. Overnight funds are suitable for parking your funds for a few days.
No, debt funds are not tax-exempt. They are subject to taxation only at the time of sale or transfer of the capital asset.
Debt Recycling
Debt recycling is where, as you pay off your home loan, you redraw the equity you have built up to invest in shares or other property; again, the bad debt becomes a good debt that can earn you an income and can be used to pay back the loan, as well as providing tax breaks.
Liquidity: Debt funds feature high liquidity, with speedy redemption, usually within one or two working days. Unlike fixed deposits, there's no lock-in period, but some funds may impose minor exit costs for early withdrawal.
When interest rates rise, debt mutual funds investing in shorter-term bonds are generally more resilient. These funds are less affected by interest rate fluctuations and can provide stable returns. For short-term investments, liquid funds or low-duration funds are suitable.
Investment Process
This money is their capital. They use this capital to buy fixed-income securities like bonds and money market instruments tools. These securities pay interest over time. The fund manager collects this interest.
A general rule of thumb to consider is that if your expected rate of return on investments is lower than the interest rate on your debt, you should pay down debt first. Historically, the stock market has returned an average of between 9% and 10% annually.
Investors start to expect that interest rate will fall more in future which further leads to an increase in current rates. This works best for existing bonds. This same kind of scenario was expected when Corona crisis hit the economy, but surprisingly debt funds gave negative returns.
Drawbacks of debt financing
Having high interest rates – Interest rates vary based on various factors including your credit history and the type of loan you're trying to obtain.
Debt funds invest in securities that generate fixed income, like treasury bills, corporate bonds, commercial papers, government securities, and many other money market instruments.
Securitised Debt Instruments (SDIs): Higher returns than FDs (14% return can yield 50K monthly on a 43 lakh investment). Grip Invest offers listed and rated SDIs. Fixed Deposits (FDs): Safe but lower returns (7% return needs an 86 lakh investment for 50K monthly).
Fixed Deposit. They are consistently regarded as one of the best investment options and the safest form of investment. In addition, you can assemble high returns from various Fixed Deposit schemes through a fixed deposit.