Savings

Are loan funds better than normal savings?

Are loan funds better than normal savings?

Debt fund are mutual funds in which investment is made in corporate and government bonds, treasury bills and corporate debt securities. They offer a consistent return on investment. Debt funds have become popular investment instruments in recent years due to their low risk and consistent returns.

Debt funds are gaining more and more takers among those seeking consistent growth and low risk for their investment. But are these debt-based mutual funds better than regular savings? Relying on loan funds to build your future savings could be rewarding if you keep things like investment horizon, credit quality, and interest rates in mind before investing. A good mix of debt funds and conventional savings instruments in your portfolio could help you get a better return on your investment.

Low risk

You should assess the risk factors before investing in mutual funds. If you have a low appetite for risk, investing in debt funds might be an ideal option. These funds are low to medium risk depending on the type of debt held. Debt funds offer a lower return than equity funds, but these categories of mutual funds are less affected by market volatility. So, if you are looking for the security of your principal amount and a constant return, go for the debt funds. Debt fund offer a higher return than fixed deposits and conventional savings.

Mutual funds also allow investors to invest in much safer credit instruments, from government securities to corporate bonds. Some debt mutual funds, called fixed income mutual funds, even provide investors with fixed cash flow through interest payments.

Liquidity and investment horizon

Contrary to common perception, debt funds can be quite liquid and if invested in mutual funds through ETFs, then they are extremely liquid. These mutual funds can be exchanged, sold or redeemed at any time. For example, you can consider various fixed income mutual funds offered by Axis Bank, such as Axis Corporate Debt Fund, Axis Banking and PSU Debt Fund, Axis GILT Fund, Axis Money Market Fund, Axis Short Term Direct Fund and Axis Overnight Fund, among others. .

These funds are suitable for meeting your short-term financial goals and also fall into the low to moderate risk category. If you are looking for an investment period of one week to three years, debt funds could be ideal for you.

Tax saving

You can save tax on your investments in debt funds through a process called indexing, which is not allowed for other savings like fixed deposits or equity funds. Indexing is the process by which your tax payable on gains from mutual fund investments can be adjusted for the rate of inflation. Redeeming or selling debt mutual funds after holding them for at least three years offers tax advantages. Tax on the sale of mutual funds after three years falls under the Long-Term Capital Gains Tax (LTCG), which is set at 20% of the appreciation.

Conclusion

Debt funds are ideal for investors who have a low appetite for risk and want a regular return on their investments. If you put your money in bank accounts and fixed deposits, debt funds could offer you a better return compared to these conventional savings. Although debt funds are less volatile than equity funds, investors should consider credit risk, interest rate risk, and liquidity risk before selecting a debt fund. The net asset value (NAV) of mutual funds fluctuates with the change in interest rates and higher interest rates have a negative impact on it. You should therefore choose debt funds based on your investment objectives and risk assessment. Debt funds give stability to your portfolio and most of these funds are managed by professionals, who try to get the best return possible. Debt funds cannot be ignored if you are looking for a relatively higher return, compared to saving in bank accounts and term deposits, with tax advantages.

[Disclaimer: Mutual Fund Investments are subject to market risks, read all scheme related documents carefully]

(The article mentioned above is a Consumer Connect initiative. This article is a paid publication and does not involve any journalistic/editorial involvement by IDPL, and IDPL claims no liability.)