Can Debt Funds Be Useful In Beating Inflation? Find Out

NDTV Profit Desk

21 Jul 2021, 10:22 AM IST

The main goal of debt funds is to give investors a steady income throughout the investment tenure

Debt funds are mutual funds that invest in fixed income securities like bonds and treasury bills, corporate bonds, commercial papers, government securities, and other market instruments. These funds have a fixed date for maturity. Even their interest rate is fixed. Because of these 2 reasons, debt funds are also known as fixed-income securities. Market fluctuations usually don't affect the returns on these tools. So, debt funds are considered to be low-risk investment options. Individuals who do not want to invest in a highly volatile equity market prefer to invest in debt funds. A debt fund provides a steady income and is comparatively less volatile.

Investors who want to secure their portfolio against inflation, which brings down the real rate of interest of fixed-income investments, put their money in debt funds.

How To Invest

You can invest in debt fund schemes through an asset management company or an online platform.

Goal

The main goal is to give investors steady income throughout the investment tenure. So, investors can choose from various debt funds and check whether their investment horizon matches the duration of the scheme. This will help investors understand a fund's performance and make informed decisions when the market is volatile.

Types Of Debt Funds

The Securities and Exchange Board of India (SEBI) has categorised debt funds into sixteen categories such as overnight funds, liquid funds, money market funds, short-duration funds, medium duration funds, long-duration funds, long-duration funds, etc.

Short-term debt funds: These funds have a duration of 1-3 years and moderate interest risk.

Medium-term funds: These funds have a duration of 3-4 years and moderate interest risk.

Long-duration funds: These funds offer higher returns but at a higher interest rate risk.

Taxation

Short-term gains on debt funds are taxable as per your tax slab rate. Long-term gains on debt funds are taxable at 20 per cent with the benefit of indexation. Investing in debt funds allows investors in diversifying their portfolios to protect themselves from volatility in the stock market. Investors sometimes also look towards debt funds to achieve short-term financial goals.