Even though mutual funds are becoming popular with retail investors, a majority of the new investors opt for equity funds via the SIP or the Systematic Investment Plan and debt funds remain unexplored by them. Here are some interesting statistics that would be effective in illustrating this point.
Around 80% of the equity assets in terms of mutual funds are owned by individuals. Just the remaining 20% of the assets are owned by institutional investors.
The situation seems to be the reverse specifically, in the event of the debt funds. Only about 27% of all debt fund assets are owned by individuals while as much as a whopping 73% of all the debt fund assets are owned by institutional investors.
Retail investors are still in favor of equity funds and this is chiefly because mutual funds are not able to offer assured returns. This anomaly seems to be further complicated by the sheer absence of awareness relating to the amazing advantages of investing in the debt funds.
Even though debt mutual funds provide several amazing advantages, only a few small investors are willing to put their valuable money in debt mutual funds.
Here are some chief reasons why debt funds are more beneficial as compared to the equity funds. It is also, a proven fact that debt funds are a much better investment option as compared to other existing options present in the fixed income landscape.
Here are the chief reasons why one must consider opting for debt mutual funds instead of equity funds.
Debt Funds Are Relatively More Liquid
A debt fund seems to be very liquid. You have the flexibility of withdrawing your investment whenever you wish and you could get back the money in your account the very next day.
Unlike your conventional assured return products, no penalty would be levied for exiting prematurely. You have the advantage of making partial withdrawals whenever you so desire but definitely without breaking the whole interest.
Moreover, breaking your fixed deposit would be requiring more documentation and involve lots of paperwork as compared to simply a click of the mouse in case of a debt mutual fund. To learn more more about financial debts and management, visit the reference site NationalDebtRelief.com
Tax Efficient
Consider investing in debt mutual funds, because they are far more tax efficient as compared to the conventional assured return products, in which case, interest income would be taxed annually at different income tax slab interest rates.
However, with debt mutual funds, just the change that occurs in the net asset value would be taxed.
You might required to pay STCG or the Short-term Capital Gains tax according to the rates applicable to the different income tax slabs if the units are held for less than three years. Thereafter, investors would be benefits from LTCG or Long-term Capital Gains tax (20%) just on that particular component of the actual gain which exceeds inflation.
For instance, suppose you earn 9 percent per annum for 3 years or more from the debt mutual funds and suppose the inflation rate is only 5 percent then you are required to pay tax just on specifically the incremental returns amounting to just 4 percent.
We call this indexation which is calculated by utilizing the CII or the Cost Inflation Index. So we may say that even if bank deposits and debt funds would be providing the same returns after the expiry of three years, you could be getting relatively higher post-tax returns specifically from debt refunds.
Offer Wider Variety Irrespective of Time Horizon
Unlike the conventional assured return products, we know that the debt funds would be offering a broader spectrum. Irrespective of the time horizon, you would find an appropriate debt fund. In this context, you must know that for shorter period involving less than even three months, you would be getting liquid funds.
These are regarded as a better alternative to the savings bank accounts because they are known for stable returns and high liquidity. You have access to a wider variety and in case of every one, the risks and returns are said to be commensurately higher while investing over a longer term.
Offer Higher Returns
You must know that the pre-tax returns coming from debt funds would be comparable with returns from other traditional options like bonds and fixed deposits.
However, if any changes occur in terms of the interest rates, the debt funds could be giving you higher returns. Rate changes do not impact short-term debt funds intensely.
Funds that are invested in long-term bonds seem to be super-sensitive to interest rate changes. In case the interest rates dip, the bonds’ value would be shooting up resulting in capital gains obviously for the investor.
Facilitate Regular Cash Flows
With rising life expectancy and decreasing interest rates today, there is a growing fear and insecurity that the retirees could be running out of the retirement corpus.
Fortunately, debt mutual funds could prove to be of great help in providing regular cash flows that are tax-efficient via the SWPs or the Systematic Withdrawal Plans in mutual funds.
Conclusion
Debt funds offer convenience and great flexibility. You could be investing small amounts practically every month via SIP or when you are having surplus cash.
One crucial advantage of investing in debt funds is that you could shift the amount seamlessly into an equity fund from your debt fund.
When you have a reasonable amount for investment, you may invest that substantial amount in your debt fund. You could then initiate a systematic transfer strategy to an equity scheme you wish to purchase.
We may conclude by saying that it is high time that investors allocated a certain part of their savings to such choices like the debt funds to enable convenience, variety, and tax efficiency.
Before taking any proactive steps, have understanding about know-how, the risks and the associated rewards involved in investing your money in debt mutual funds.
It is suggest to consult the an mutual fund experts about different kinds of risks involved like the credit risk, interest rate risk etc. You could be investing in a fund which can effectively meet your time horizon and fulfill your risk appetite.