“Aren’t all mutual funds the same?” you might wonder. After all, isn’t it a Mutual Fund?” Gokul enquired. Harish, a Mutual Fund distributor, smiled at him. Many people had made such a statement before, and he was all too familiar with it.
A lot of individuals believe that all mutual funds are the same. There are several sorts of funds, the most common of which are equity and debt funds. Where the money is invested is the distinction between the two. Equity funds engage primarily in equity shares and related securities, whereas debt funds invest in fixed income instruments. The characteristics of both equities and fixed income instruments determine how the respective schemes will behave.
Which is better equity mutual fund or debt mutual fund?
A debt fund is a mutual fund that invests in fixed-income securities such as government and corporate bonds, Treasury bills, commercial paper, certificates of deposit, and other similar securities. SEBI has divided debt funds into 16 groups after categorizing and rationalizing them. It divides debt funds into categories based on where the money is invested.
Short-term debt funds invest in bonds with a one- to three-year maturity duration. It’s a good fit for low-risk investors who have a similar time horizon. For investors in higher tax bands, it is a more tax-efficient investment than fixed deposits.
Debt funds are under pressure to redeem their assets. In India, there is a small secondary market for bonds and money market instruments. As trading volumes decline, selling pressure increases, pushing traded yields higher. Prices decline as a result, and debt funds earn negative returns.
In recent months, the RBI has lowered the repo rate. Short-term debt funds earn a lesser return while interest rates are falling. Long-term debt funds, on the other hand, do well in a declining interest rate environment.
Debt funds make money by investing in bonds and other fixed-income instruments. Debt funds would buy these securities and profit from the interest. The interest income determines the yields you and other investors earn from debt funds.
Debt funds invest in various types of bonds, the values of which fluctuate with the economy’s interest rates. If a debt mutual fund buys a bond and its price rises due to a drop in interest rates, the fund will profit in addition to the interest income.
To safeguard your portfolio from the stock market’s volatility, you should diversify it using debt funds. Regardless of your age or how interest rates change in the market, you must always include debt funds in your portfolio.
Debt funds may be appropriate for you depending on your investing goals and risk tolerance. To maximize your return, you should begin investing in debt funds as soon as possible and stay invested for as long as possible.
You can invest in debt fund direct plans online by going to the mutual fund house’s website. Fill out the application form and submit your PAN and Aadhaar details to complete your eKYC.
- You can choose the best debt funds based on the mutual fund house’s track record. Before investing in debt funds, look at the fund manager’s investment style.
- Invest in a mutual fund company that manages a huge amount of money (AUM). During a financial crisis, it may be able to withstand sudden redemption demand.
- Examine the credit quality of the debt fund’s portfolio. You might want to look into debt funds that have AAA-rated bonds in their portfolio.
- Before investing in debt funds, think about your risk tolerance. Interest rate risk is a concern for debt funds, particularly long-term debt funds.
Interest rate swings have resulted in negative returns for debt funds. Longer-term debt funds are more exposed to interest rate risk.
Open-ended debt mutual fund schemes are ultra-short debt funds. It invests in bonds with a three- to six-month Macaulay duration.
- Select short term debt funds from the debt funds category, based on your investing goals and risk tolerance, and then click Invest today.
- You must choose the amount you want to put into the short-term debt fund program as well as the form of investment, which can be either one-time or monthly SIP.
Depending on how long you retain loan funds, you’ll have to pay capital gains tax. Your capital gains are considered short term capital gains if you invest in debt funds for less than three years and then sell your shares (STCG). Short-term capital gains are included in your taxable income and taxed according to your tax rate.
Long term capital gains are earned when you invest in debt funds for three years or longer and then sell your assets (LTCG). Long-term capital gains are taxed at a rate of 20%, plus any relevant cess.
An accrual-based method is used by accrual debt funds. It’s a form of debt fund that invests in short- to medium-term debt. It focuses on holding securities until they reach their maturity date.
When interest rates vary, modified duration reveals how sensitive a bond is to price changes. Bond prices and interest rates move in opposite directions, according to a basic notion.
The price sensitivity of a bond to changes in yield to maturity is calculated using modified duration. The modified duration of a bond can be calculated by multiplying the Macaulay Duration by a factor of (1+y/m).
The letters ‘y’ and’m’ stand for the annual yield to maturity and the number of coupon payments per period, respectively.
Long term capital gains are earned when you invest in debt funds for three years or longer and then sell your assets. With the indexation benefit, your long-term capital gains in debt funds are taxed at 20%.
Indexation allows you to alter the cost of debt funds to account for inflation. The Cost of Inflation Index (CII) can be used to index the acquisition cost of debt mutual fund units.
For example, if you bought 1,000 units of a debt fund in FY 2013-14 at a NAV of Rs 15, you would have made a Rs 15 profit. In FY 2018-19, you sold 1,000 debt fund units for a NAV of Rs 22. Your gains of Rs 7,000 (Rs 22- Rs 15) * 1000 are referred to as long term capital gains because you have held the debt fund units for more than three years.
ICoA = Original cost of debt fund acquisition* (CII of year of sale/CII of year of purchase), where ICoA is the indexed cost of acquisition.
As a result, your capital gains will now be Rs 2,909 instead of Rs 7,000, i.e. (Rs 22,000 Rs 19,091).
On Rs 2,909, you must pay a 20% long-term capital gains tax, which comes to Rs 582.
Fixed-income securities such as government and corporate bonds, Treasury bills, commercial paper, certificates of deposit, and other money market instruments are invested in by debt mutual funds.
Indexation allows you to account for inflation in the purchasing price of debt funds. This example will help you learn how to calculate indexation in debt funds.
Assume you put Rs 1 lakh into debt mutual funds in the fiscal year 2015-16. After more than three years, you redeemed your investment for Rs 1,50,000 in FY 2019-20. You have Rs 50,000 in capital gains.
Inflation Adjusted Purchase Price of Debt Funds = Actual Purchase Price of Debt Funds X (CII in the year of sale/CII in the year of purchase)
Instead of Rs 50,000, you must pay 20% LTCG tax on Rs 36,220 (Rs 1,50,000 Rs 1,00,000).
On your LTCG on debt funds, you pay Rs 7,244 in long-term capital gains tax, which is 20% of Rs 36,220.
Debt funds are divided into sixteen categories by SEBI. Overnight funds, liquid funds, ultra-short duration funds, low duration funds, money market funds, short-duration funds, medium-duration funds, medium to long-duration funds, long-duration funds, dynamic funds, corporate bond funds, credit risk funds, banking and PSU funds, gilt funds, gilt funds with 10-year constant duration, and floater funds are some of the options available.
Based on your investing objectives and risk tolerance, you can choose the optimal debt fund. Take a peek at the debt fund’s portfolio. Debt funds with AAA-rated bonds in the portfolio are an option. When compared to lower-rated bonds, it is safer.
Choose a debt fund with a lower expense ratio than the average. Before choosing the best debt funds, look at the mutual fund house’s and fund manager’s track records.
Debt funds invest in fixed-income assets. It is less risky than equity funds, which invest in stocks and are vulnerable to stock market volatility. Debt funds can help you diversify your portfolio.
Debt fund safety is determined by the type of debt fund and interest rate variations. When interest rates rise, long-term debt funds may produce negative returns. When interest rates fall, short-term debt funds offer a lesser return. Credit risk funds invest in bonds with a lower credit rating. If the bond issuer fails to make principal and interest payments, you could lose money.
Debt funds invest in fixed-income assets and are a type of mutual fund. Debt funds are subdivided into liquid funds. It makes investments in fixed-income securities having maturities of up to 91 days. Other debt funds, on the other hand, may have a longer maturity profile.
Risk: When compared to other debt funds, liquid funds offer the lowest risk. When compared to other debt funds, it has the lowest credit and interest rate risk.
Liquidity: Compared to other debt funds, liquid funds have a high liquidity and can be quickly redeemed at the AMC.
The major distinction between equity and debt funds is where your money is invested. Equity funds engage primarily in company stock and associated assets, whereas debt funds invest in fixed-income instruments.
Depending on your investing goals and risk tolerance, you can pick between equities and debt funds. To attain your long-term financial goals, you can invest in equity funds.
Over the long term, say five years, equity funds would perform well. Debt funds are appropriate for one- to three-year financial goals.
The majority of money in equity funds is invested in company stock. Debt funds are mostly invested in fixed-income securities.
Depending on your investing goals and risk tolerance, you can pick between equities and debt funds. Equity funds would do well in the long run and are appropriate for long-term financial goals like home ownership or retirement preparation. Debt funds are a safe investment that can be used to save for a vacation or other short-term financial goals.
To safeguard your portfolio from the stock market’s volatility, you might diversify it using debt funds. To attain short-term financial goals, you can invest in debt funds. Debt funds are less hazardous than equities funds since they invest in fixed income instruments.
Debt mutual funds, depending on the type of debt fund, invest in a portfolio of bonds with varying credit ratings. The likelihood of a bond issuer defaulting on principal and interest payments is known as credit risk.
Credit risk funds, on the other hand, invest in lower-rated bonds. When compared to debt funds that invest in AAA-rated bonds, it is exposed to credit risk because the risk of default is higher for lower-rated paper.
When compared to fixed deposits, debt funds are more tax-efficient. Bank fixed deposit interest is added to your taxable income and taxed according to your tax rate.
Short-term capital gains are capital gains earned after holding debt funds for less than three years (STCG). The STCG is deducted from your taxable income and taxed according to your tax bracket.
Long-term capital gains, on the other hand, occur when you keep debt funds for three years or more (LTCG). LTCG is taxed at a rate of 20%, with the advantage of indexation. When compared to bank fixed deposits, it is more tax-efficient.
If you are in a higher tax rate and have a longer investment horizon than three years, debt funds are a better option than bank FDs.
Under the accrual method in debt funds, you want to earn a consistent interest income from debt funds and keep the paper until it expires. In fixed income instruments with a short or medium-term maturity, fund managers use the accrual strategy. It is primarily a buy-and-hold strategy, in which the portfolio’s instruments are held until maturity.
Accrual funds are debt mutual funds that seek to earn interest income primarily from the coupons supplied by the assets they own. However, capital gains may provide a modest fraction of the total return for accrual funds.
- Under the tab ‘CG’ of the ITR utility, enter the STCG details under ‘Short term capital gain’ point number 5 ‘From sale of assets other than at A1 or A2 or A3 or A4 above’.
- Also, under’short term capital gains taxable at appropriate rates,’ add the amount of STCG in the ‘F’ section of the ‘CG tab.’
Which is better to invest equity or debt?
Debt securities typically carry less risk and provide a lower potential return on investment than equity assets. Debt assets, by their very nature, are less volatile than stocks. Bondholders are paid first, even if a firm is liquidated.
The most frequent type of debt investing is bonds. These are bonds that are issued by businesses or the government to raise funds for their operations. They usually have a fixed interest rate. The majority are unsecured, although they are given a rating by one of several agencies, such as Moody’s, to suggest the issuer’s potential integrity.
What is difference between equity and debt?
Debt securities imply a loan to the company, whereas equity securities indicate ownership in the company. Debt securities offer a predetermined return in the form of interest payments, whereas equity securities have variable returns in the form of dividends and capital gains.
Is it good to invest in debt mutual funds?
According to Khandelwal, these funds have taken a bigger risk than necessary by investing in low-quality papers in order to obtain higher profits.
When investing in debt funds, the goal is not to make big returns but to provide safety, and the return may be 1% to 2% more than FDs or savings accounts.
Look at the credit quality of the papers you’re investing in: When choosing a debt fund, look at the credit quality of the papers it’s invested in, she says, noting that this information is readily available in fact sheets that come with the fund.
The fund is now secured if it has more than 90% of its exposure in AAA or AA paper.
Meanwhile, if the AAA exposure is 40% or 50%, you may want to take a step back and consider it.
At least 50 to 60 underlying debt papers should be held by the fund: In debt funds, said Chenthil Iyer, a Sebi certified investment advisor and chief strategist at Horus Financial Consultants, “overdiversification is a desirable thing.”
“In a fund, there should be at least 50 to 60 underlying debt papers. As a result, the risk of concentration is lowered. Also, make sure there are 25 to 30 distinct recipients for the funds, with none of them receiving more than 5 to 10% of the total “ghtage,” he says.
According to Mahendra Jajoo, CIO, Fixed Income, Mirae Asset Management Company, investors should invest in banking PSU funds, corporate bond funds, or dynamic bond funds for three years or more.
Then, for the next two to three years, he should consider short-term funds.
The money stored in liquid funds or ultra short term funds for emergency use or the contingency reserve should therefore be kept in liquid funds or ultra short term funds.
Which is safe equity or debt?
The key difference between equity and debt funds is risk, with equities having a higher risk profile than debt. Investors should be aware that risk and return are inextricably linked; in other words, larger returns need more risk.
Regulated:
If you’re worried about mutual funds being a risky investment, don’t be. They’re entirely safe. Because the SEBI (Securities and Exchange Board of India) and the AMFI oversee and manage mutual funds, no one can steal your money (Association of Mutual Funds in India). Furthermore, similar to a bank’s banking license, the license to run a mutual fund company is provided following due diligence. This safeguards the safety of your mutual fund assets.
Diversified portfolio at low cost:
Diversification reduces the risk of your portfolio by absorbing the negative impacts of a few stocks within it. Individually constructing a diverse portfolio can be costly and time-consuming, but mutual funds have this feature built in. So, even if you invest just Rs.500, you’ll be placing your money into a well-diversified portfolio that spans industries, sectors, and even asset classes.
Professional fund management:
Your money is managed by trained and experienced specialists in mutual funds. They make investment decisions after conducting extensive study and keep a tight eye on their holdings. So all you have to do is invest in a mutual fund scheme based on how much risk you’re willing to take and how long you want to invest.
Mutual fund investments, as you may know, are susceptible to market risks, credit concerns, and interest rate risk. However, with regular reviews and the right investment, this may be readily managed. When your investing horizon is smaller than three years, for example, you can choose debt funds. You can invest in hybrid funds (moderate risk), large-cap equity funds (moderate to high risk), or sectoral funds for periods longer than that (high risk). Another alternative is to invest in mutual funds through a SIP (systematic investment plan), which allows you to invest a specified amount in mutual funds on a regular basis. This will allow you to average your investment costs while also protecting you from excessive market changes. You can simply outsmart inflation and generate decent long-term profits. All of these advantages are available to you if you invest in mutual funds.
ICICI Securities Ltd. is a financial services company based in India ( I-Sec). ICICI Securities Ltd. – ICICI Venture House, Appasaheb Marathe Marg, Mumbai – 400025, India, Tel No: 022 – 2288 2460, 022 – 2288 2470 is I-registered Sec’s office. ARN-0845 is the AMFI registration number. We are mutual fund distributors, and any issues arising from our distribution activities would not be subject to the Exchange’s investor redress or arbitration mechanisms.
Please keep in mind that mutual fund investments are subject to market risks; read all scheme-related papers carefully before investing. I-Sec cannot guarantee that the fund’s goal will be met. Please take note of this. Depending on the circumstances and forces affecting the securities markets, the schemes’ NAV may rise or fall. Information provided herein is not guaranteed to be accurate or representative of future results, and it may not be comparable to other investments. If investors are unsure whether the product is right for them, they should consult their financial advisors.
The information supplied is not meant to be used as the only basis for investment decisions by investors. Investors must make their own investment decisions based on their individual investment objectives, financial situations, and needs.
The preceding information is not intended to be construed as an offer or suggestion to trade or invest. Investors should make their own decisions on the suitability, profitability, and fitness of any product or service mentioned above. I-Sec and its affiliates accept no responsibility for any loss or damage of any kind resulting from activities done in reliance on the information provided.
Which is cheaper debt or equity Why?
For numerous reasons, debt is less expensive than equity. The main reason for this is that debt is exempt from taxation. Interest is calculated on the debt based on earnings before interest and taxes. As a result, we pay lower income taxes than when using equity financing.
Are debt funds safe?
Rule: Debt funds are safe investments since they are not exposed to volatile assets like equity shares. Long-term debt funds, on the other hand, might provide negative returns when interest rates are rising. The funds that held long-term bonds incurred losses, with the average fund losing 7.26%.
Is debt riskier than equity?
Many businesses have more debt than equity, but Google is an exception. Google is debt-free today. Is this, however, a good thing or a negative thing?
I (Joe) was recently facilitating a meeting with employees of a small business that had recently been acquired by a larger public company. Prior to the merger, the little business had no debt. “Why do we have debt in this new company?” the prior owner of the small firm inquired during the balance sheet discussion. “I despise debt.”
The majority of us are unconcerned about debt. Consumer debt is wreaking havoc on our economy, as we all know. So, why is debt beneficial to a business?
A corporation should use debt to finance a major percentage of its business for two reasons.
To begin with, the government incentivizes businesses to employ debt by enabling them to deduct debt interest from corporate income taxes. With a corporate tax rate of 35% (one of the highest in the world), that deduction is extremely appealing. After accounting for the tax advantage associated with interest, a company’s cost of debt is frequently less than 5%.
Second, debt is a considerably less expensive source of capital than stock. The fact that equity is riskier than debt is the first step. Because common shareholders are often not legally obligated to receive dividends, they expect a particular rate of return. Because the company is legally bound to pay the debt, it is far less hazardous for the investor. Furthermore, when a company goes bankrupt, shareholders (those who contributed the equity funds) are the first to lose their money. Finally, stock appreciation accounts for a large portion of return on equity, which necessitates sales, profit, and cash flow growth. Due to these dangers, an investor typically seeks a return of at least 10%, although debt can usually be found at a lower rate.
It would be illogical for a public firm to rely solely on its shareholders for funding. It’s a waste of time. Debt is a lower-cost source of capital that allows equity investors to earn a better return by leveraging their money.
So why not finance a company totally with borrowed money? Because taking on all of the debt, or even 90% of the debt, would be too hazardous for the lenders. To keep the average cost of capital low, a company must balance the use of debt and equity. The weighed average cost of capital, or WACC, is what we call it.
Returning to Google. It’s a roughly $22 billion firm that’s debt-free and inefficient. Google’s concern is that their cash flow and profit are so good that they can fund the company with retained earnings. However, as Google matures and its growth slows, I believe debt will become a more crucial source of funding.
What is debt mutual fund?
A debt fund is a Mutual Fund scheme that invests in fixed income products that offer capital appreciation, such as corporate and government bonds, corporate debt securities, and money market instruments. Fixed Income Funds or Bond Funds are other names for debt funds.
Low cost structure, reasonably constant returns, great liquidity, and decent safety are just a few of the primary benefits of investing in debt funds.
Debt funds are great for investors who want a steady stream of income but don’t want to take any risks. Debt funds are less riskier than equities funds since they are less volatile. Debt Mutual Funds may be a better alternative if you’ve been saving in traditional fixed income products like Bank Deposits and are looking for consistent returns with low volatility.
Is PPF a debt fund?
According to this definition, both the EPF and the PPF are debt investments with a guaranteed rate of return and a defined repayment period. They are, therefore, both included in the debt portfolio.
Do debt funds give monthly income?
Invesco India Regular Savings Fund, which was launched on June 1, 2010, is another hybrid debt fund that is regarded as one of the top monthly income plans. The scheme’s main goal is to generate consistent income by investing in a portfolio of fixed income assets including Gold ETFs, as well as equity and equity-related instruments. Since its inception, the fund has returned 6.9% and has a moderately high risk of investing. Individuals with a moderate or low risk appetite who desire a consistent return on investing might choose this fund.
Reliance Hybrid Bond Fund
This is another another debt-oriented hybrid fund that is regarded as one of the top monthly income plans for consistent returns. Reliance Hybrid BondFund has returned 9.84 percent over the previous five years. Investors can easily enroll in this plan with a minimum lump-sum investment of Rs.5000 and a SIP investment of Rs.500.
With the goal of generating a safe and consistent return on investment, the fund primarily invests in debt and money market securities. Additionally, a small amount of the funds is put in equities to produce capital appreciation. This fund is best suited for investors with a moderate to low risk appetite who want to profit from capital appreciation and consistent returns.
UTI Regular Savings Fund
The UTI Regular Savings Fund has provided a 9.72 percent return since its inception. Investors can participate in this scheme with a minimum lump-sum of Rs.5000 and a minimum SIP of Rs.500. The fund has returned 10.18 percent over the last five years, while the average return over the last three years has been 8.44 percent. This monthly income plan is classified as a debt-oriented fund, which invests primarily in debt instruments such as government securities, corporate bonds, and so on. As a profitable option investment, this fund is best suited for those with a relatively high risk appetite and a desire to earn a consistent return on investment while also benefiting from capital growth.
Apart from mutual funds monthly income plans, other investment options such as fixed maturity plans, post-office monthly income plans, and so on can also be profitable. If you want to get a larger return, though, mutual fund monthly income plans are a good option.
