Debt Funds

 

WHAT ARE DEBT FUNDS?

Debt funds are mutual fund products that generate moderate but steady returns as they lend money to corporates in the form of loans.

This helps corporates to fulfill their immediate and short term fund requirements for managing their day to day operations and cash flow to ensure smooth functioning of their business operations.

The funds are used towards buying raw materials, payment of salaries, opening new branches, introducing the latest technology to increase efficiency, etc.

They also diversify and invest in other fixed income instruments like:

• Certificates of Deposits (CDs)
• Commercial Papers (CPs)
• Treasury bills
• Government Bonds (G-secs)
• PSU and corporate bonds
• Debentures
• Cash and call instruments and so on.

These terms mean that they lend money and earn interest on the money they have lent. This interest that they earn forms the basis of the returns that they generate for investors.

These funds may have a maturity of as low as 1 day to 5 years and beyond. These funds are divided into various categories depending on their duration.

Also, one should note that debt funds earn decent returns, but there is no guarantee of returns. Sometimes, it may be high, sometimes low. There is a possibility of negative returns also.

Also, retail investors who cannot access the short-term money markets directly, let their money lie idle in their bank account. Since a debt fund has to account for interest earned every day and offers redemption on a t+1 basis, investors can access the market instead of settling for a lower return by going through an intermediary like the bank.

 

 

HOW DOES A BOND MARKET WORKS AND WHAT INFLUENCES BOND PRICES IN THE MARKET?

Bonds are instruments which are offered to investors as a security against the money which they have lent to earn interest.

Buying a bond or investing in a deposit involves holding the instrument to maturity. Unless there is a default, one can expect the interest to come in as promised.

Assume you have invested in a 3 years bond offering 7% interest per annum. Then assuming 6 months later, interest rates move up to 8%. With this, new bonds will get issued at the new rate. Due to this, our older bond or deposit, which continues to run at 7% is now less valuable. Who would buy a bond that pays 7% when the market rate is 8%? The market will mark its price down. The price of the old bond has to fall so that earning 7% on it is the same as earning 8% on the new bond. This is the mark to market risk in a debt fund.

A debt fund is uniquely exposed to this risk because it declares a daily NAV that reflects the value of the bonds it holds. Every time rates move up, older bonds lose value, and every time rates come down, they gain in value. An investor who buys and sells a debt fund, pays the NAV that reflects this market reality.

Therefore, the investor does not earn just the interest income, but also gains or loses from the change in the value of the bonds. This gain or loss can be higher or lower, depending on how the cash flows in the fund are structured. We measure it with a number called duration. Higher the duration of the fund, the greater the mark to market risk.

 

 

VARIANTS OF DEBT FUNDS

1. Dynamic Bond Funds – As the name suggests, these funds are ‘dynamic’ in nature, which means that the fund manager keeps changing portfolio composition to make the most of changing market rates scenario. Dynamic bond funds invest in both, instruments of longer as well as shorter maturities. Hence, the frequent change in portfolio composition makes these bonds more dynamic but less stable.

 

2. Income Funds – To create income in the long run, “Income Funds” most often invest in securities that have long maturities. This makes them more stable than dynamic bond funds. The average maturity of income funds is around 5-6 years.

 

3. Short Term Debt Funds – These funds invest in instruments with shorter maturities, ranging from 1 to 3 years. Due to such low range, these funds are ideal for conservative investors as they are not largely affected by long term interest rate movements.

 

4. Ultra Short Term or Liquid Funds – These funds invest in debt instruments with the shortest maturity of not more than 91 days. Such a short duration prevents fund managers from taking any long term exposure to interest rate risk thus making these funds almost risk-free. Rarely have liquid funds seen negative returns. 

These funds are the best alternatives to savings bank accounts as they provide similar liquidity with better post-tax returns. Some mutual fund companies also offer instant redemption on liquid fund investments using debit cards.

 

5. Gilt Funds – Gilt Funds offers the highest level of safety as they invest only in highly rated government securities involving a very low credit risk. As these are government securities, these funds are ideal for risk-averse fixed-income investors.

 

6. Credit Opportunities Funds – Unlike other debt funds, credit opportunities funds make some risky calls to earn higher returns by holding lower-rated bonds that come with higher interest rates. Credit opportunities funds are relatively riskier and risk-averse and short term investors must stay away from these.

 

7. Monthly Income Plans – Monthly income plans belong to a hybrid fund category whose objective is to offer regular income in the form of periodic (monthly, quarterly, half-yearly) dividend payouts. These plans primarily invest in bonds and securities that declare dividends from time to time.

 

8. Fixed Maturity Plans – Fixed Maturity Plan is a closed-ended debt instrument with a pre-defined tenure that invests primarily in fixed income instruments like certificates of deposits or bonds that lock-in yields at the current level.

 

 

IMPORTANT POINTS TO NOTE ABOUT DEBT FUNDS

The following are some of the important features of the DEBT FUNDS that every investor must know.

1. Investor’s profile – It is best suited to investors who want to invest for short to medium term and for the specific tenure. It is not suitable for long term investing beyond 5 years due to limited returns.

 

2. Risk – Debt funds are considered to be the moderate risk-moderate returns investment. It is comparatively safer than equities since money is lent to companies in the form of loans. Bonds of companies with poor credit rating offers higher returns as they compensate for higher credit risk involved as compared to AAA-rated companies.

 

3. Liquidity – Liquidity of debt funds is based on the tenure selected. Short term debt funds are less volatile hence more liquid as compared to the medium term and long term.

 

4. Taxation – Income earned from the sale of debt funds is considered as “Income from capital gains” and if held for more than 36 months, it qualifies for indexation benefits. However, it does not provide tax benefits.

 

5. Volatility – Returns from debt funds are market-linked which makes them volatile. However, being a debt instrument, its volatility is limited and the returns it offers is pre-determined due to which its returns are indicative.

 

6. Time horizon – Bonds are available with different maturities and are suitable for investors having a time horizon of 1 to 3 years or maximum up to 5 years. Beyond that is a good duration to invest in balanced or equity funds.

 

7. Regular Income – Some debt funds offer dividend payouts which can help investors generate cash flow however, they are not guaranteed and subject to dividends being declared by companies from time to time that they have invested money in.

 

8. Returns – Since they are market-linked, their returns are not fixed. However, one can expect the average returns in the range of 4% to 13% depending on the quality of bonds and duration of funds.

 

9. Asset class – Debt mutual funds as the name suggests are debt instruments. However, some debt funds also take exposure to equities to boost returns where they continue to remain debt instruments to generate stable returns.

 

10. Cost – Fund houses charge expense ratio to facilitate mutual fund investments.

 

11. Loan facility – In case of emergencies, investors can pledge their mutual funds units as collateral to avail loan facility.

 

 

WHO CAN INVEST IN DEBT FUNDS?

Any Indian resident, NRI, HUF or Institutional investor can invest in this scheme.

 

 

MINIMUM AND MAXIMUM INVESTMENT ALLOWED IN DEBT FUNDS

One can start investing in debt funds with as low as 500/-. There is no maximum ceiling.

 

 

WHERE DO DEBT FUNDS INVEST YOUR MONEY?

The funds accumulated from investors are invested in government securities, corporate bonds and deposits of various tenures issued by companies. Investors gets return in the form of fixed interest however, they are not guaranteed and completely determined by the performance of the company. Hence, though these are called fixed return instruments, their returns are market-linked.

 

 

WHAT KIND OF RETURNS CAN DEBT FUNDS GENERATE?

On an average, one can expect to earn around 5% - 12% in debt funds depending on the market performance and interest rate movements.

Assuming, you invest Rs. 10,000/- per month until retirement (60 years) @ average rate of 8% per annum, the corpus you will create (approximately) on your retirement i.e. at the age of 60 at various age groups will be as follows: 

 

HISTORICAL DATA OF RETURNS IT HAS GENERATED SO FAR

The returns some of the debt funds have generated in the last 10 years

 

The returns some of the G-sec funds have generated in the last 10 years

 

FUND ACCESSIBILITY AND LOCK-IN APPLICABLE FOR DEBT FUNDS

Debt funds are available in various tenures like long term, short term and ultra short term. Investors having an investment horizon of more than three years can invest in long term funds, while investors with a medium to short term horizon can invest in funds having a time-frame of one to three years.

 The ultra short term funds or liquid funds are for those investors who wish to park their funds for a few days or they can also use this option as a substitute for their regular savings account.

Investors should note that “Fixed Maturity Plans” are close-ended funds and has lock-in. Once invested, investors would not be able to redeem it until maturity however, they can look for the buyer in the secondary market. It should also be noted that FMPs are very thinly traded on the stock market.

 

 

WHAT ARE THE BENEFITS OF INVESTING IN DEBT FUNDS?

DEBT FUNDS offer the following benefits to its investors.

1. Predictable Returns – Though returns in debt mutual funds are completely dependent on the performance of the fund, its returns are somewhat indicative and predetermined.

 

2. High liquidity and better substitute to a savings account – Ultra short term debt funds or liquid funds are more tax efficient if held for more than 36 months. Also, the returns it generates are in the range of 5% - 7% depending on the holding period and market rates. This makes them a better alternative to most savings account deposits.

 

3. No TDS – Debt funds do not attract TDS which marginally increases their earnings. The tax is deducted only on returns it earns at the time of redemption.

 

4. SIP – Systematic investment plan is available in mutual fund investments which is one of the best ways of investing to take benefit of rupee cost averaging.

 

5. Risk Mitigation – By investing even a nominal amount in mutual funds, you can get exposure to several companies. So, if you have Rs 2,000 in any fund, you will be able to take exposure to various large-cap companies and lower risk of concentration.

 

6. SEBI Regulated – Mutual funds in India are regulated by SEBI, who is their governing body. They restrict fund houses with their strict rules and regulations to keep their code of conduct and ethics in place and often protect investor's interests.

 

7. Low cost – Cost of investing in debt funds is comparatively low as compared to other insurance oriented debt products due to low expense ratio.

 

8. Tax-efficient – If compared with other fixed return instruments like fixed deposit, it is more tax-efficient if held for more than 36 months as the returns it generates will be taxed at 20% with indexation benefit.

 

9. Expert Advice – One of the major benefits of investing in mutual funds is that you need not worry about choosing high-quality bonds and sectors to invest in. Successful investing requires a lot of research and knowledge. You need to dig deep into the financials of a company before you invest in it. Here, the fund manager does the job for you who is well qualified, understands the market dynamics and has competency in taking strategic investment decisions.

 

 

WHAT ARE THE LIMITATIONS OF INVESTING IN DEBT FUNDS?

DEBT FUNDS has the following limitations.

1. Moderate or Low returns – Since it offers predictable returns and is exposed to limited risk, the returns it generates is comparatively low as compared to any equity-oriented mutual funds.

 

2. Opportunity Loss – Since pure debt funds do not take any exposure to equity, it may keep you deprived of any opportunity to earn more when the market is flourishing.

 

3. No guaranteed returns – Inspite of giving moderate returns even in the long term, they are not guaranteed.

 

4. No control over the selection of bonds – Since investment decisions on the selection of bonds, which corporate to lend to etc. are taken by the fund manager, investors are left with no option to choose the investment of their choice.

 

5. Regulations and restrictions – Since SEBI is a governing body of mutual funds in India, their strict rules and regulations sometimes acts as a barrier for the fund manager in taking higher risk or independent calls to exploit available opportunities in the market.

 

6. Too many options – With the number of fund houses and options of funds that exist in the current scenario, investors are left confused with where to invest and how to choose the best fund and sometimes end up picking up the fund with very poor growth prospects. Hence, one should always take advice and use the expertise of financial advisors.

 

7. Not 100% safe – Though debt funds offer a comparatively higher level of safety as compared to equity funds, it is not 100% safe as it is exposed to credit risk and interest rate risk.

In case, the company they have invested money in defaults in making interest or principal payments, the NAV falls, which directly impacts the value of your investment. Also, its returns are not as stable as .

 

 

WHO SHOULD CONSIDER INVESTING IN DEBT FUNDS?

DEBT FUNDS is most suited to the following investors:

1. Low-risk-takers – It is best suited to individuals having surplus funds, who want to park it somewhere where they can earn predictable returns with low impact from market fluctuations and wants to earn more than what they get in the savings account.

 

2. Senior Citizens – Individuals above 60 years of age who do not have an appetite for high risk of market fluctuations however, willing to take a moderate risk to earn better post-tax returns than fixed deposits can diversify their investment and invest in debt funds.

 

3. Investors who want to invest for a specific period – Any investor who wants to park funds temporarily for the short term can invest in ultra short term debt funds or liquid funds.

 

4. Investors with high equity exposure – Investors with high equity exposure who are looking forward to creating a debt portfolio. It is a good option to diversify and create a retirement corpus.

 

5. Investors nearing retirement – Due to its low-risk profile, investors nearing retirement can start transferring their equity investments into this category as it provides higher stability and lower credit risk. Post-retirement, investors may need funds soon and any market correction or fall can put their retirement planning at risk.

 

6. Investors in higher tax slab – Investors who fall under the higher tax slab of 20% or more can invest in debt funds as the income earned is treated as capital gains and provides indexation benefit. This gives this investment an edge over a fixed deposit.

 

7. Investors with high liquidity requirements – Liquid funds and ultra short term funds can generate much better post-tax returns as compared to a regular savings bank account. Hence, individuals keeping high balance in their savings bank account can park funds in these avenues.

 

 

WHO SHOULD AVOID INVESTING IN DEBT FUNDS?

DEBT FUNDS may not be the best investment for the following investors:

1. High-risk-takers – Young investors especially below 35 years of age, who have age by their side and can take higher risk to earn much better returns in equity mutual funds or direct equities.

 

2. Investors with a long time horizon – Individuals having an investment horizon of 5 years or more can invest in balanced funds or equity mutual funds as this period is long enough to take exposure to equity mutual funds to earn better post-tax returns.

 

3. Investors looking for regular income – DEBT MUTUAL FUNDS do not guarantee regular income to its investors. Any price appreciation in the value of the fund is added to its NAV and paid at the time of redemption.

Also, in case of dividend payout option, the dividend payout is subject to many conditions and paid to its investors only as and when declared.

 

 

A PIECE OF ADVICE

THINGS YOU SHOULD DO WHILE INVESTING IN DEBT FUNDS

DEBT FUNDS investors must follow the below suggestions while investing to maximize the value of their investment.

1. Perform due diligence – Never invest in mutual funds before verifying the credentials of the company and checking their credit ratings. Usually, companies with low ratings try to lure investors with attractive returns. But don’t fall in the trap as they are very risky. One should thoroughly study the risks involved in such instruments.

Also, investors should be aware that though debt funds in a way are considered as s, they do not guarantee returns. Thus, returns it generates completely depends on the performance of the company they have lent money to and various macroeconomic factors.

 

2. Consider risk involved – One should always assess their risk appetite before investing in these instruments. Some debt funds take exposure to low rated companies which are considered as a high risk – high return debt investment. And someone with moderate income, sole bread earner of the family, low on savings and high on liabilities tend to have a very low-risk appetite as even a minor loss may derail their financial life. Such individuals should be very careful while investing in such avenues.

 

3. Know the pros and cons of investing in direct plans – Though investing in direct scheme is cost-effective due to lower expense ratio, it loses the edge in the form of expert advice and services of your financial planner. Their attention and expertise in the subject can help you achieve much better returns which may surpass the saving you would have had by investing in direct schemes. As it is rightly said, sometimes, saving pennies can cost you fortune. Hence, choose a regular plan provided your portfolio is being managed by a competent financial advisor.

Some broking houses also provide a user-friendly and robust online interface to help you keep track of your investments and manage them effectively. It not only gives you a single-screen view of all your investments across different fund houses but also lets you carry out transactions at your ease. The only downside of having a middleman or a broker is higher expense by a very small margin to accommodate their commission payout but that is small enough to make a significant difference to your investment kitty.

 

4. Know your investment goal – Mutual fund offers a variety of debt funds with different maturity and risk profile. Hence, one should bear in mind all pros and cons of investing in a particular fund.

Some debt funds take exposure to bonds with a high credit rating which involves lower risk and higher liquidity while some invest in bonds of poorly rated companies making it riskier and less liquid.

 

5. Understand what kind of returns it can generate – Investors be aware that though debt funds in a way are considered as fixed returns instruments, they do not guarantee returns. Thus, returns it generates completely depends on the performance of the company they have lent money to as the company performance is subject to various macroeconomic factors.

 

6. Track your investments annually – It is very important to revisit your investment portfolio once every 6 months or at least once a year to review its performance. Its performance should be in line with its benchmark and other funds of similar nature. In case of any deviation, a decision needs to be taken after thorough analysis, whether to stay invested or to exit and look for a better performing fund.

 

7. Check entry and exit load – It is important to study every aspect of the fund while investing in mutual funds. An entry load is a onetime fee that you pay while investing in a scheme. Similarly, exit load is a fee you pay for exiting from the scheme before one year. Hence, if you anticipate any possibility of liquidating your investment before a year, invest in a scheme without the exit load.

 

8. Always diversify – The safest way of investing in mutual funds is by diversifying your risk across various sectors or companies. Concentration on one particular sector can be very risky and may result in partial loss of capital as well.

 

9. Check the cost of Investment – Like equity funds, debt funds are also subject to a fee called an “Expense Ratio”. Hence, considering lower returns generated by debt funds as compared to equity funds, a short-term holding period may erode returns generated by debt funds whose expense ratio is high. Hence, always compare the expense ratio while investing, especially among the funds which are identical in all aspects and index funds. Hence, lower the expense ratio, higher the returns.

 

10. Gain Clarity – Scheme details and claim on returns should be verified with scheme information document at the time of investing. Investors sometimes get deceived by false claims from the agents due to a lack of knowledge.

 

11. Update nomination details – Updating nominee details with the respective fund houses is very important. In case of an investor’s death, the family members should not end up running from pillar to post when they need that money the most to claim your investment proceeds.

 

THINGS YOU SHOULD AVOID DOING WHILE INVESTING IN DEBT FUNDS

DEBT FUNDS investors must avoid indulging in following practices while investing to protect their investment from losing its value.

1. Investing during increasing interest rate scenario – This is because bond prices are inversely related to market interest rates. It means that the bond prices start to fall when market rates increases and vice-versa.  This happens because bonds issued at a coupon rate of 6% per annum loses its value if market rates go up to 7% per annum as new bonds are now available at a 1% higher coupon rate.

 

2. Borrowing money to invest – A lot of brokers or agents will lure you with attractive returns however, one should understand the risk involved in debt instruments with poor credit rating. How much ever promising the investment looks, one must be very careful about fundraising methods. Never borrow money to invest in risky options as a minor miscalculation can lead to heavy losses where all your money can vanish if the investment fails.

 

3. Investing in direct schemes – Though investing in direct scheme is cost-effective due to lower expense ratio, it loses the edge in the form of expert advice and services of your financial planner. Their attention and expertise in the subject can help you achieve much better returns which may surpass the savings that you may have by investing in direct schemes. As it is rightly said, sometimes, saving pennies can cost you fortune. Hence, choose a regular plan provided your portfolio is being managed by a competent financial advisor.

 

4. Selecting a fund only based on past returns – Though past performance is one of the key determinants of fund’s credibility, it should not be the only deciding factor while picking up the investment. The glorious performance in the past can be a result of various factors that may or may not exist in the future. Hence, one should make a note of sectors the fund is exposed to, the track record of the fund manager, etc. while making a decision.

 

5. Going heavy on small-cap or risky funds – Though small-cap and mid-cap funds are a very good vehicle to boost returns, one should not get over-enthusiastic and take heavy exposure on these funds as their performance is subject to various micro and macroeconomic factors. It lacks stability and hence should only be looked at as a booster to other blue-chip funds.

 

6. Short term investing – If you see any possibility of redeeming the fund within 1 year of investing, avoid investing in the scheme other than liquid funds, or take a small exposure.

 

7. Do not get influenced by anyone but financial experts – A confused investor always has a tendency of reaching out to their friends and relatives for suggestions while making critical investment decisions. That happens irrespective of the knowledge and the level of understanding the friend has about the domain. It is as good as asking a truck driver, how to fly an airplane. Such advices in most cases are based on their individual experiences and hardly on calculations or facts and figures. Hence, instead of blindly following the financial advice of a random friend, investors must act wisely and take assistance of a well qualified financial planner who has sound knowledge about the domain.

 

 

WHAT ARE THE RISKS INVOLVED IN DEBT FUNDS?

DEBT FUNDS investors should be mindful of following risks involved in this investment:

1. Credit risk – Many investors expose themselves to a higher credit risk by investing their money in companies with low credit ratings. They take such risky calls to earn higher interest and returns on their investment as these companies are always willing to pay more due to their weak market reputation.

Many times, these companies start defaulting not only in making timely interest payments but also the principal repayments. Hence before investing, one should always check the credit rating of the company rated by CARE, CRISIL, etc.

 

2. Interest rate risk – It refers to a risk where bond prices lose its value due to an increase in market interest rates. For example, a bond purchased at a coupon rate fixed at 6% will lose its value if the market rates go up to 7% and fresh bonds are available at a better rate. In such a scenario, the demand for bonds you are holding will fall as nobody would like to buy bonds offering a lower rate than current market rates. With this, the price of the bond will fall causing the NAV of the debt fund to fall as well thus denting your investment.

 

3. Inflation risk – Though debt funds involves low risk and give stable returns, the downside is, the returns it generates is still not good enough to beat inflation year on year. The average rate of inflation is around 8% per annum whereas average post-tax returns generated by fixed-income investments are less than 7% or even lesser in most cases. This may lead to a shortfall when you look at the corpus you created in meeting your financial goals. Hence, it is very important to study the fund you are investing in and go through its past performance and prospects.

 

4. Liquidity Risk – Bonds and debentures can only be liquidated at the time of maturity. This makes certain debt funds less flexible on liquidity and allows its investors to exit the fund only on payment of exit load.

 

5. Concentration risk – Certain debt funds invest in bonds issued by companies of a particular sector or take a very high exposure to one particular sector. Due to this, the fate of investors is largely dependant on the performance of that particular sector. This increases their exposure to risk due to over-concentration in one particular sector.

Hence, the portfolio composition of the fund should be looked at very carefully while choosing the fund.

 

 

HOW TO SELECT THE BEST DEBT FUNDS?

DEBT FUNDS investors must follow the below instructions before signing up for the product to ensure the safety and growth of their investment.

1. Get to the roots of the fund history – Before investing, find out as much information possible about the track record and the past performance of the fund. One should religiously study the portfolio composition of the fund. Then study the financial statements like Profit and Loss statement, cash flow statement and balance sheet along with the credit rating of the company they are investing in. The company which is low on debt and high on operating income is usually found to be more stable and involves a lower risk of default.

 

2. Check the track record of the fund manager of that particular scheme – Fund manager is the key decision-maker of any scheme and they are the ones who run the show. It is very important to learn about their background like their qualifications, past performance, work experience, expertise in their line of business, a character like have they indulged in any unethical activity or do they have any criminal charge against them in the past and present, etc. Also, their financial health and investment intelligence should not be ignored.

 

3. Study portfolio composition – When the scheme is focussed on a particular sector then the risk also gets concentrated on the performance of that particular sector. A slowdown in that particular sector can derail your overall investment. Hence, look for the fund that is evenly diversified across various companies and sectors.

 

4. Select technologically sound brokers – If you are investing through independent brokers then make sure they are well equipped with modern technology and systems. This will not only help you keep track of your investments online but also help you in making investments and redemptions yourself without depending on anyone.

 

5. Analyze performance – Where does the scheme stand against its competitors in terms of AUM size, market share, performance, etc. If the scheme has been in business for a while and still fails to build sizeable AUM or generate minimum returns against its benchmark and fellow competitors in similar schemes, then the reason for underperformance should not be ignored.

 

6. Always prefer funds with a good track record – A track record of the fund is important not just from its returns point of view but also from its strong corporate governance and ethics. If the fund is found deviating from its investment goal in a few instances or has displayed poor performance consistently should be avoided.

 

7. Liquidity requirements – Some debt funds are highly illiquid. During emergencies, withdrawing funds during unfavorable market situations may result in losses. Hence, one should refrain from investing in long term funds if they anticipate any expenses which may trigger redemptions.

 

 

TAXATION RULES FOR DEBT FUNDS

Income earned from the sale of mutual funds units is termed as “Income from Capital gains. However, the amount of tax applicable will be determined by the period of holding.

 If the investment in debt fund is held for less than 36 months then it will be termed as short term capital gains and anything beyond 36 months will be termed as long term capital gains.

Tax applicable in case of short term capital gains will be added to your total taxable income and will be taxed as per applicable slab. And in case of long term capital gains, the tax applicable will be 20% with indexation benefit.

 

 

DOES ANY OTHER PRODUCT OFFER BETTER PROSPECTS THAN DEBT FUNDS?

A DEBT FUNDS can be beaten by the following products on various grounds.

1. From a safety point of view – Bank fixed deposit is safer as compared to debt-oriented mutual funds as the returns it generates are fixed. Also, it carries a relatively lower credit risk if booked with reputed banks. Fixed deposits are however the most inefficient option in terms of taxation which can further lower your post-tax returns.

 

2. From the returns point of view – Balanced funds generate better returns as they participate in the equity market also.

Equity mutual funds, on the other hand, generate even better returns in the long run however it carries a higher risk of principal loss as they invest directly in the stocks of various companies.

If someone is looking for even better returns and has a high-risk appetite then they can invest in or of various companies.

 

3. From a liquidity point of view – Some of the debt funds carry exit load which means if funds are withdrawn within a stipulated time, it may attract a penalty of 1% which may differ across fund categories. Hence, if someone is expecting any major expense soon can consider investing in liquid funds or ultra short term funds which not only generates decent returns but also offer high liquidity.

 

 

HOW TO INVEST AND DOCUMENTS NEEDED

1. Update KYC – The first and the most important requirement is updating KYC details with the registrar. This can be done by submitting the KYC form with your PAN card and address proof to CAMS office or your investment advisor or AMC.

 

2. Create a profile with a broker or Fund House – Then the profile needs to be created by updating your details with the registered broker or a fund house to open your account.

 

3. Register Online – Once the account is opened, one needs to set up a user ID and password to register online or on mobile application and then start making transactions.

 

4. Offline Mode – One time transactions can also be executed offline by filling a form of the particular AMC and issuing a cheque. To start SIP, the investor needs to sign the SIP mandate which specifies the amount and period of investment to set up auto-debit on the account.