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SIPs in Debt Funds – Here’s why they are beneficial to investors

Setting aside a fixed amount of money every month specifically for savings or investment is the best way to create wealth. For people willing to invest a fixed amount every month rather than a single time investment of a huge amount starting a SIP is the most preferred option today.

The declining interest rate regime and the excessive liquidity caused by demonetization, higher savings and financial literacy have led the investors to look for investment alternatives with better returns whilst ensuring maximum safety of capital. But is there a more efficient way to earn?

Mutual funds are increasingly becoming a part of everyone’s portfolio. Debt Fund category of mutual fund invests most of the money gathered from investors into fixed income instruments like corporate bonds, government bonds, bonds issued by banks, certificate of deposits, treasury bills etc. There are numerous benefits to investors doing SIPs in Debt Funds. Below are some of the most important features:

Any kind of investment may have a negligible chance of default. There is no guarantee of return in the debt category either. Returns are market-linked, and the investor is fully exposed to defaults or any other credit problems in the entities whose bonds are being invested in. However, the MF industry is closely regulated and monitored by the regulator, the Securities and Exchange Board of India (SEBI). Regulations put in place by SEBI keep tight reins on the risk profile of investments, concentration of risk in funds, valuation of investments and the compliance of funds with its goals. In the past, these measures have proved to be highly effective with very few adverse cases.

The other big difference is taxation. When an investor has SIP in a Debt Fund and stays invested for at least 3 years, the capital gain is taxable with an indexation benefit and the Long-Term Capital Gain Tax payable is 20% which is far better than paying tax as per tax slab, especially when one is in the highest tax bracket. However, in the case of debt mutual fund schemes, if the holding period is less than 3 years, the tax levied will be as per the tax slab.

On redemption, open-ended debt funds proceeds are typically credited within a period of 2-3 working days. Debt mutual funds, other than Fixed Maturity Plans, do not restrict redemption. However, many funds charge exit loads, ranging from 0.25–1% of the redeemed amount, if they are redeemed within a pre-specified period. Such periods can range anywhere from 15 days to 6 months. Ultra-Short-Term and many short-term funds may not charge exit loads and are best suited to park any emergency fund.

Debt funds generate approximately 1-4% returns. Debt fund investments take both credit risk (lending to riskier borrowers) and interest rate risk (the risk of bond prices falling when interest rates rise). Hence, such investments are compensated by higher returns. However, since debt funds invest in a diverse range of securities and are very tightly monitored, they probably offer the best risk-adjusted returns.

We advise you to contact your financial advisor and enjoy substantial returns while not taking any significant risks.

Views are personal: The author is Rajesh Sarawgi, a Mutual Fund Distributor from North-East.

Disclaimer: The views expressed are of the author and are personal. TAML may or may not subscribe to the same. The views expressed in this article / video are in no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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