Mutual fund managers believe that debt funds are set to excel in 2019. According to data from the Association of Mutual Funds in India, more than 50% of debt fund assets that come from retail investors is increasing steadily.
Debt funds are types of mutual funds that invest in fixed-interest securities — for example – treasury bills, corporate bonds, government securities and other money-market instruments. Typically, the portfolio manager or asset management company charges a total expense ratio to manage your investment portfolio.
Now that you know what are debt funds, let us understand what makes them a good investment option in 2019.
Why invest in debt funds in 2019?
In 2018, the debt market faced tremendous volatility, just like the equity market. The primary factors responsible for this fluctuation were a rise in crude oil prices, yields going up, rising interest rates, tightening liquidity and currency depreciation among other macroeconomic factors. However, despite the volatility, debt mutual fund categories outperformed many equity mutual fund categories in the last one year and even topped the charts.
Among debt fund categories, the liquid fund category performed the best with a return of 6.89% in one year. Long-duration funds held the second spot with a yield of 6.84%. This was followed by gilt funds and short-duration funds in the third and fourth spot with returns of 6.56% and 6.00% respectively.
Last year’s uncertainties are now reversing. Oil prices have come down by almost 30-35%, and the currency has stabilized. Open Market Operations [OMOs] have reinforced liquidity back into the market, and more such continuous OMOs from the Reserve Bank of India will ensure that government securities remain stable and robust.
Benefits of investing in debt mutual funds in 2019
Following are the top advantages of investing in debt mutual funds
High liquidity
Debt funds are often compared to other traditional forms of investment, such as fixed deposits [FDs] because of similar investment terms and earning income over time. However, FDs have a mandatory lock-in period. If you wish to withdraw your money, they take a long time to process the withdrawal request. On the other hand, debt funds offer better liquidity, especially liquid funds, and can be cashed out more quickly.
Tax efficiency
The benefit of indexation keeps increasing with every passing year after you have held your debt funds for three years. This ultimately results in the investor paying less tax. Also, debt mutual fund schemes do not attract TDS. Whereas, alternative investment options such as FD attract 10.3% TDS if the interest income exceeds Rs. 10,000 in a single year.
Flexibility
Debt fund schemes provide great flexibility and can be easily transferred to equity schemes or any other scheme of your choice.
Higher returns
When compared to other investment options, debt funds are less exposed to market volatility and thus, less risky. They fare better in terms of returns when compared to a savings bank accounts or FDs. For example, the average rate of return on FDs is between 6% and 8%, whereas debt funds can fetch as high as 9.38% over a 3-year horizon.
Ways to invest in debt funds
There are two ways you can invest in debt funds – lump sum or Systematic Investment Planning [SIP]. While lumpsum investing is when you have a large corpus fund ready to invest, SIPs can be used when you wish to invest regularly in small amounts. Both these options have their own merits.
Conclusion
If you wish to invest in mutual funds, remember that debt mutual funds are integral for your overall portfolio returns in the long run. Based on your investment horizon and risk appetite, you will be able to strike the ideal mix of assets to reap maximum returns on your investment.