Debt Investment: Investment in Debt Mutual Fund 2023
Debt mutual funds have been in the news recently for the change in their taxation. Debt is always a controversial topic in personal finance since many people prefer to avoid it. But this does not hold true for all for making debt investment. When someone approaches this with a prudent and strategic mindset, debt may be a powerful tool for building wealth and achieving financial success.
Simply put, debt mutual funds will now be taxed on a par with fixed deposits from FY 2023-24. In other words, gains on debt mutual fund redemption or mutual funds where not more than 35% is invested in equity shares of domestic companies will be taxed as short-term capital gains (STCG) from April 1, 2023. This gain will be taxed at an Individual’s relevant Tax Slab.
🔸Types of Debt Mutual Funds
Investors have access to a range of debt mutual fund types, which they can choose from according on their investment objectives, risk tolerance, and maturity length. Top 5 Types of Debt Mutual Funds are follows:
1️⃣Liquid Fund: The only assets in which Liquid Fund will invest are debt and money market instruments with residual maturities of no more than 91 days. In comparison to more traditional methods, the underlying instruments may offer decent returns and are moderately liquid.
2️⃣Overnight Fund: This fund invests in assets with a one-day maturity (overnight fund). Overnight Funds are thought to be generally stable because of their short maturity periods, which also contribute to their minimal credit and interest rate risk.
3️⃣Money Market Fund: Securities having a maximum one-year maturity are the focus of money market funds. This fund is a suitable choice for short-term money storage. It can also be utilized as an emergency fund due to its comparatively high liquidity and possibility for higher profits.
4️⃣Corporate Bond Fund: Investments in corporate bonds with AA+ or higher are the focus of the corporate bond fund. Investors with a modest appetite for risk who are looking to invest in papers with lesser credit risk might think about this choice.
5️⃣Banking & PSU Fund: A minimum of 80% of the assets in the Banking & PSU Fund are placed in debt and money market securities issued by banks, PSUs (public sector undertakings), public financial institutions, and municipal entities.
🔸Merit of Investing in Debt Mutual Fund 2023
Liquidity: Debt funds are regarded as liquid since withdrawals are possible whenever business hours are in effect. A few liquid funds allow investors to rapidly withdraw up to 50,000 per day, depending on the scheme, from those funds.
Tax Efficiency: Taxes on debt funds are only levied when the funds are redeemed, and they are only levied on the earnings of the redemption. Debt funds are more tax-efficient as compared to other debt investments
Stability: Due to their often lower volatility than equities funds, debt funds help stabilize an investor's portfolio. This helps diversify an investor's portfolio and lower overall risk. They are also seen as a dependable, long-term, and rather constant source of income.
Possibility of Higher Returns: Compared to traditional investment options, debt fund investments may provide better returns. An investor can profit from changing interest rates and even create income by choosing the right fund that suits their risk tolerance and time horizon for investing.
Low-Cost Investment: According to the SEBI rules, the total expense ratio of a debt fund cannot exceed 2% of Assets under Management. Among debt funds, overnight and liquid funds have very low expense ratios as compared to other funds.
🔸 Demerit of Investing in Debt Mutual Fund 2023
Failure to Pay Interest: Investments in long- or short-term debt funds are typically made in money market instruments, corporate deposits, and government securities. Despite the fact that debt funds are safer and not susceptible to market risks, it is possible for the institution where you invest to fail to pay the debt fund's interest rate.
No command over the money: Individual investors will have little influence over the debt funds' ongoing operations because your funds and account will be managed by qualified fund managers.
Debt funds remain one of the top investment options in India for a lower-risk investment with higher returns despite these drawbacks.
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