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Five reasons to invest your money in debt funds

Last updated on: March 13, 2013 09:39 IST

Five reasons to invest your money in debt funds

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K Ramalingam

Despite their advantages common investors mostly ignore debt funds. By this logic, debt funds should get a unique place in your asset portfolio. Here are five simple situations when prudent investors can use debt funds.

1. To meet short-term goals

If you have got a goal, which you are planning to achieve in the short term, say a year or two, then debt funds are the ideal place to invest. Debt funds are less volatile when compared to equity funds. Also they offer predictable returns. You also have a choice of different debts funds which that can be matched to different short term horizons: one-month, six-month, nine-months, one-year, 18-months and so on.

You can't take risk and invest your short-term money in the stock market. You need to ensure safety and liquidity, very much offered by debt funds, as far as short-term investments are considered.

The author is an MBA (Finance) and Certified Financial Planner. He is the director and chief financial planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.


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2. Any time money

There are times when there arises an unexpected need for money. When that happens, you may need the money at short notice. Debt funds are the ideal place to invest for your emergency funds.

Nowadays liquid funds of a few mutual fund companies come with debit card facility. So you can keep your entire emergency reserves in these kinds of debt funds and avail of them even at a very short notice.


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3. Pay less tax than fixed deposits

If you fall under 20 per cent or 30 per cent tax bracket, then investing in debt funds makes more sense for you compared to fixed deposits. Interest earned from fixed deposits is clubbed with your income and taxed at applicable tax bracket rates. Whereas debt funds, if invested for more than one year, will be taxed at 10 per cent without adjusting for inflation.

For less than one year, I will suggest you invest under the dividend reinvestment option of debt funds. The reason being dividends from debt funds are taxed at 13.51 per cent.

The interest from fixed deposits will be taxed on accrual. Even on your cumulative deposit, you need to pay tax annually. As far as debt funds are considered, you will be taxed only when you actually redeem money from the debt fund.


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4. As a launching pad for large equity investments

It is generally suggested you should not invest lump sum amount in equity funds. You need to stagger your investments in order to take advantage of the volatile stock market. To do this you can use debt funds as a launching pad.

That is you can keep the entire money in a debt fund and gradually you can invest them into equity funds in a staggered manner. If you would like to do this staggering in a more systematic and sophisticated manner, you can opt for STP -- systematic transfer plan. That is you can give a standing instruction to transfer a fixed sum from a debt fund to an equity fund periodically.


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5. To generate regular income

If you want to generate regular income then debt fund is an ideal investment for you. You can get regular income by way of choosing dividend payout option.

One more way to generate regular income from debt funds is to opt for SWP from debt funds. SWP is systematic withdrawal plan which works in the reverse of SIP. From a large sum of investment, you can opt to withdraw the appreciation or a fixed sum on a regular basis.

Debt funds play an important role in a portfolio that cannot be replaced by any other investment vehicle.

Next time when you come across any of these situations, make use of debt funds to your advantage.


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