Investing in mutual funds has always been a commotion as there is the huge amount of risk involved, fixed returns and the investment style. To make sense with respect to mutual we first need to understand that mutual funds as a whole offer investment in equity, debt, commodities and even a combination of them depending on the objective of the fund. Accordingly, the investor can find an appropriate product as per risk, goals and time horizon.
Understanding the debt funds:
- Possession of investment: Debt funds are available irrespective of the time just depending upon the possession.
Ultra-short Funds: 3 months to 1 year
Corporate Bond: >2 years
Long Term G-sec: >3 years
Income Fund: >3 years
Short Term Funds: 1-2 years
Liquid Funds: 1 day to 3 months
2. Tax Quantity: If you invest for less than 3 years, the profit is taxed at the income tax slab rate like in an FD but if you hold the investment for more than 3 years, the profit is taxed at 20% and that too not on the full gains but only on the gains that exceed inflation. The post-tax return on a debt mutual fund is a cut above to an FD, even though we inclined to think that the debt fund will generate returns similar to the traditional products.
3. The hope of higher returns: Return is nothing but a calculative risk taken by the investor. All fixed income instruments have risk involved including FD. The namely interest rate, reinvestment, and inflation risk.
In debt funds, unlike fixed deposits and small saving schemes are also subject to market risk, though it is less than equity funds, the return expectation is proportionately higher than traditional products over the same possession.
Deducing right debt fund for self:
In order to detect the appropriate fund in which one should invest, must depends on goal and risk profile. If the investment tenure is less than 3 months then one can opt for liquid funds with lower risk. But one should keep in mind that risk profile will increase with the tenure of the investment. Hence, one can opt for a plan as per requirement and risk profile will vary accordingly.
Note – Please note that the above article is part of our continuous research on the related matters. It is based on our interpretation of related regulations which may differ person to person. Readers are expected to take expert opinion before relying on above.