Are debt funds good investment vehicle for small investors?
If you would have asked this question me few years back, my answer would had been no.
But now, I will advice my readers to include debt funds in investment portfolio.
In this article I will share my personal realisations about debt funds.
In India, people who does not want to take risk opt for bank’s fixed deposits.
But the investment world has evolved and a debt funds has emerged as a better alternative.
Both fixed deposits and debt funds can generate assured returns.
Debt funds are good and as safe as fixed deposits because they invest only in assets that generates fixed income.
Some common fixed income generating assets are:
- Government bonds,
- Treasury bills,
- Corporate bonds etc.
Mutual fund purchase is very easy (compared to direct purchase of bonds etc).
Hence, I will say that debt funds are really a good investment option to grab few debt linked options.
#1. Savings account vs debt funds…
Are Debt Funds Good? Can money be parked in debt funds instead of savings account?
Few years back I used to manage my short-term goals differently.
For goals closer than 24 months I used to keep my money in savings account.
But now I rely more on debt funds.
I have seen that debt funds are good. Debt funds are as stable as savings account.
Returns of debt funds are almost double than savings account.
If you compare debt funds with diversified equity mutual funds then debt funds will look like a safe heaven.
The returns of debt funds are extremely stable as compared to equity funds.
#2. Emergency savings in debt funds…
Are Debt Funds Good, Can I park my emergency savings in debt funds?
I save approximately Rs 1 lakh per annum as emergency fund.
As on today I have accumulated slightly more than Rs 5.0 lakhs as emergency fund.
My first choice was to park my emergency funds in savings account.
But after my realisation about dent funds, I am keeping all of my emergency funds in debt funds.
I prefers to keep my emergency saving money in debt fund.
I am no banker but U know a simple mathematics.
A normal fixed deposit will not give me more than 6% returns after tax.
Debt fund yields returns close to 8% per annum.
Not only returns are higher but my funds are as secured as normal deposits.
These days debt funds also issue debit cards like savings account.
So that in times of emergency one can withdraw the money from any of the ATM.
For me this is a perfect balance between returns and liquidity of funds.
#3. Fixed Deposits vs debt funds…
Debt Funds Can Give Higher Post Tax Returns Compared to Fixed Deposits
If ones taxable income falls under tax slab of 20%-30% then return (net of tax) from fixed deposit will not be more than 5% to 7% per annum.
So it is must for us to see alternative investing option which is both secure but provides higher returns.
The best alternative option is debt funds as tax policy for debt funds is not same as fixed deposits.
Income from debt funds, if held for more than 1 year will taxed flat at 10% per annum.
#4. Debt funds is for new investors…
I will suggest new investors to start with debt funds to get a feel of investment.
I have seen that people jump in share market.
When they fail, with lost hope they try the debt linked option.
But I feel that this is not the right way.
One must try their hands in debt funds first.
One shall get the feel and excitement of compounding of money and then try hands in share market.
Once the feel of compounding of money is developed the next step will be to diversify portfolio.
By diversifying one shall include equity in portfolio.
For a new investor, diversification of investment equally between debt and equity is essential.
I will say that if you have to invest lump-sum money, go for debt funds.
For purpose of investment diversification one can start SIP is equity linked mutual funds.
#5. Debt funds can be great for retired people
For retired person Debt Funds can give reasonable fixed income.
For retired individuals regular income is of prime importance.
I feel debt funds is ideal vehicle for this goal. Debt funds has option of dividend payout to its investors.
This regular and predictable dividend payout works as a mean of income for retired individuals.
There is one great tool called as SWP (systematic withdrawal plan) associated with debt funds.
Suppose I invest Rs 30 lakhs in a debt fund with SWP option.
This can generate a returns of 8% returns per annum.
In this case, One can afford to withdraw Rs 20,000 per month without eating into the principal.
Debt is your alternative to savings account and fixed deposit.
Investor must use debt funds to cleverly manage their short term goals.
Debt funds are also great option to park your emergency funds.
Debt funds are also great for investors who wants to keep a well diversified portfolio.