Making an investment can be a daunting task. It is imperative to know what is at stake, where are you parking your hard earned money, and what are the returns. Acquisition of this kind of knowledge is not always easy. This is why let us tell you in details what are debt funds and why these funds are an excellent investment choice in the fixed income space in 2019.
What are Debt Funds?
Just like a mutual fund or an exchange-traded fund, a debt fund is a pool of investment. Debt funds are designed to invest in fixed income investments like Government Securities, Treasury Bills, Corporate Bonds, and Money Market Instruments. Most people invest in debt funds to earn a regular and steady income and gain from capital appreciation. Some of the debt funds selling like hot cakes in the investment space include Fixed Maturity Debt Funds, Credit Opportunities Funds, Gilt Funds, Liquid Debt Funds, Short-Term Debt Funds, Ultra Short Term Debt Funds, Income Funds, and Dynamic Bond Funds.
What are the reasons that you should invest in Debt Funds this year?
Here are some of the reasons why you should invest in debt funds in 2019.
SEBI’s favorable new rules for Debt Funds in 2019
SEBI has suggested several measures which hold the potential to make Debt Funds much safer than they are currently. Here are some of the suggested changes. These measures are intended to derisk portfolios, enhance liquidity, and improve diversification.
- The liquid funds are required to invest at least 20% of their assets in safer investments such as Government Securities and Treasury Bills. This is expected to increase their liquidity and strengthen their capability to tackle redemption pressure should it arise at any point in time. This will also ensure that they will not have to sell off good securities in order to raise funds.
- SEBI has divided the 15% exposure to Housing Finance Companies (HFC) to 5 % exposure to affordable housing and 10% exposure to HFCs. This is an efficient risk containment effort that is expected to boost the affordable housing sector, and the risk exposure of the HFCs will be brought down. This is a positive move from the investor perspective.
- SEBI proposes to implement only a 20% cap on sectors down from a current 25%. This will improve sectorial diversification and decrease concentration risks.
- SEBI has also imposed a 10% cap on schemes investing in money/debt market funds that have credit enhancements and a 5% cap at the group level. This is also an excellent risk containment effort in order to provide sufficient coverage. The collateral should be four times now in case of credit enhancements.
All these latest measures make 2019 the perfect time to park your hard earned money in debt funds.
Some other reasons that advocate Debt Fund investment are as follows.
The economy can take a favorable or an unfavorable turn any day anytime. Hence you should never put all your eggs in the same basket. Apart from investing in highly volatile equity funds, you must invest in more stable income generating investment instruments such as the Debt Funds. Prudent diversification of your portfolio will substantially reduce your portfolio risk. Debt funds are must have risk balancing investment instruments your portfolio needs.
Life is uncertain, and a financial crisis can hit you the next minute without a prior warning. It is pragmatic to make investments in a manner that can serve your financial emergencies should you face any. When it comes to liquidity debt funds are a prudent choice. They are highly liquid and far less volatile if you compare them to equities.
Stable and Predictable ROI
If you are a conservative investor looking for stable and regular income from your investment, then you must invest in Debt Funds. If you opt for dividend payout or a Systematic Withdrawal Plan (SWP), you can generate regular income from Debt Funds. If you have short-term financial goals, then investing in Debt funds can help you accomplish them. Since Debt Funds are associated with predictable returns, they help you achieve short-term financial goals conveniently.
If you are a conservative investor and looking for a low-risk investment with stable returns, then you must invest in Debt Funds.
Debt Funds Are Tax Efficient
In comparison to other investment instruments, Debt Funds are more tax efficient this year. If you make any capital gains on the Debt Funds, then that is taxable irrespective of whether it is a Short-Term Capital Gain (STCG) or Long-Term Capital Gain (LTCG). You must add any STCG you make on your investment in Debt Funds to your income and pay taxes as per your tax slab. A flat 20% tax is applicable on STCG from Debt Funds after appropriate indexation.
Debt Funds are a flexible investment option. You can invest a small amount of money monthly through SIP or whenever you have some surplus cash. If someday you wish to shift your money from Debt Funds to Equity Funds or any other scheme for that matter from the same fund house you can easily do so. Not many investment options give you that option.
If you have not added stability to your portfolio then with the latest SEBI measure implemented to make Debt Funds safer and with the inherent benefits of investing in Debt Funds 2019 is the right time to do so through investment in Debt Funds.