Debt funds are type of mutual funds that invests in fixed income securities such as bonds, treasury bills, and other money market instruments. They are often considered to be a low-risk investment option compared to equity funds. However, there are several myths and misconceptions around debt funds that can lead to confusion among investors. Let’s debunk some of the common myths and misconceptions about debt funds.
Myth 1: Debt funds are not affected by inflation
Fact: Many investors believe that debt funds are not affected by inflation. However, this is not true. Inflation can impact the returns from debt funds as it can lead to an increase in interest rates, which can impact the value of the bonds held by the fund. Therefore, investors should be aware of the impact of inflation on debt funds and choose the one that offers inflation-beating returns.
Myth 2: Debt funds are suitable only for conservative investors
Fact: Another misconception about debt funds is that they are only suitable for conservative investors. While it is true that debt funds are less risky than equity funds, they can be a good investment option for all types of investors. Debt funds can be used as a part of a diversified investment portfolio to provide stability and generate regular income. They can also balance the risk in a portfolio with high exposure to equity funds.
Myth 3: All debt funds are the same
Fact: Many investors believe that all debt funds are the same. However, this is not true. Debt funds can be classified based on the type of securities in which they invest, the duration of the investment, and the issuer’s credit rating. For instance, there are short-term debt funds, long-term debt funds, corporate bond funds, government bond funds, and so on. Therefore, it is important for investors to understand the different types of debt funds and choose the one that aligns with their investment goals and risk appetite.
Myth 4: Debt funds are not taxable
Fact: Another common misconception about debt funds is that they are not taxable. However, this is not true. The returns from debt funds are subject to taxation, and the tax rate depends on the duration of the investment. If the investment is held for less than three years, the returns are taxed as per the investor’s income tax slab. Suppose the investment is held for more than three years. In that case, the returns are taxed at the rate of 20% after allowing for indexation benefits.
Myth 7: Debt funds are the same as fixed deposits
Fact: Many investors believe that debt funds are the same as fixed deposits. However, this is not true. While both debt funds and fixed deposits offer fixed returns, debt funds are subject to market risks and the returns are not guaranteed. Additionally, debt funds offer greater flexibility than fixed deposits, as investors can choose the duration of the investment and exit the investment at any time.
To wrap up
Debt funds are a suitable investment option for investors looking for regular income and relatively lower risk. However, investors should be aware of the risks associated with debt funds and choose the one that aligns with their investment.