The capital you put into a debt fund (also referred to as a fixed-income mutual fund) is used to invest in fixed-income assets such as treasury securities, debt instruments, corporate debt, as well as other money-market assets, among other things. Debt funds minimize the risk element for investors significantly by allocating assets to such outlets. As a reasonably safe investment option, this one has the potential to produce significant wealth.
As a general rule, experts advise that your emergency savings must contain enough funds to cover your basic costs for a duration of 6 to 12 months. This fund can also be used to achieve other financial goals, such as purchasing a car or taking a trip overseas but should not be viewed as a means of establishing a substantial retirement corpus, as would be the case with long-term objectives such as college education. Besides your current lifestyle and financial obligations, the amount of the corpus would be determined by these factors as well.
How exactly do debt funds work?
Investing in bonds as well as other fixed-income instruments, as well as other routes, is the goal of debt funds, which seek to create returns for investors. Thus, these funds purchase bonds and receive investment returns on the money they have invested.
Fixed deposit (FD) functions in a similar way to how it does. Depositing money in your bank is equivalent to loaning money to the institution. Interest is earned by the bank on the money that has been loaned.
Investment gurus suggest that clients who are extremely conservative and do not want to go further than fixed deposits could consider debt mutual funds for their retirement fund. In particular, they point out again that investors in the highest tax bracket might benefit from more favorable tax treatment on the debt mutual fund returns, particularly if you invest for just a longer period of time than 3 years.
Why it can be a good option for retirement corpus-
Increased availability of funds
An agreed-upon lock-in time is included with fixed deposits. A penalty may be imposed by your lender if you prematurely liquidate your FD. Although debt funds do not have lock-in periods, several of the funds do levy an exit load, which is a fee levied at the time of withdrawal for taking money out of the fund too soon. There is a difference in the length of the exit load period amongst funds, and some funds have no exit load at all. Bond mutual funds, on the other hand, are very liquid and allow you to withdraw the investment from the fund at any time during normal business hours.
Returns that are consistent
Funds that invest in debt are much more inclined to provide a constant rate of return that is not influenced by market conditions. For those who aren’t interested in taking risks, they provide a less risky substitute. For those who wish to prepare for a certain savings goal within a specific term, debt funds are the greatest option available.
More secured
Debt funds, as previously said, are a safe and securely investing choice. Short-term debt funds, as well as long-term debt funds, both have this as a significant advantage. Their performance is unaffected by market risk, and their transaction costs are likewise modest.
Conclusion
You must make certain that the cash you have invested is secure and that you can quickly access it when you need it. In this case, stock investments are automatically ruled out as a viable choice. Stock market volatility generated by domestic or foreign events is extremely dangerous for equity investments in the near run.
