With increasing focus of the RBI on increasing the liquidity in the financial system, debt funds for shorter tenure are considered to be far more profitable as compared to long-term funds. Debt funds are funds which are managed professionally, and the funds are invested in a diversified portfolio made up of fixed and debt income securities.
These funds regularly pay dividends based on the income on interest, depreciation and appreciation of the Short Term Debt Fund. While the dividends are not fixed, they are hardly volatile because, in most of the cases, the debt securities pay a fixed amount of interest, which is a major part of the dividend.
Let us have a look at five features of these funds.
- Not as Volatile as Equity Market
Debt funds are not as volatile as the equity market, making them a better choice for investors with low-risk appetite. As the funds are invested in fixed and debt-based securities, the interest incomes are fixed, and the prices remain comparatively less volatile.
- More Liquidity as Compared to FDs
Debt funds are highly liquid too. One can withdraw the investments as and when required and the money is available in the bank account in a day or two. Also, unlike FDs, fund houses do not charge penalties if the investors exit the fund too soon. While there are some fund houses that do charge an exit load when investment is withdrawn in 3-6 months, most of the funds do not.
- Better Flexibility
Debt funds have better flexibility. One can select a SIP for investing every month and can then change to another scheme, like an equity fund of the same fund house. Moreover, even the investment amount can be increased and decreased, if required.
- Higher Returns
As compared to a fixed deposit, the returns on debt funds can be higher. Whenever the interest rate changes, the bond prices are affected too. Bonds of longer tenure are highly sensitive to the changes in interest rate as compared to bonds of shorter tenure. If there is a rate cut, the prices of long-term bonds increases and this offers higher returns to the investors.
- Fund Continues to Grow Until You Redeem It
When you invest in an open-ended debt fund, the fund continues to grow until the time you redeem it. If the money is invested in a close-ended maturity plan or FD, the investor gets a lump-sum amount when the pre-defined tenure comes to an end. Busy lifestyles and hectic schedules can mean that you might spend a few days before encashing the deposit and reinvest the money. This can have a significant impact on overall returns. One never faces such problem with debt funds as the investment keeps growing until you redeem it.
Debt funds for shorter tenure come with many features that make them an excellent choice for investors with low-risk appetite, who are looking for better returns as compared to FDs and also want regular income.
Mutual Fund investments are subject to market risk. Please read the offer document carefully before investing