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What You Should Know About Debt Funds

At present, beneficiaries can withdraw up to Rs 2 lakh from their NPS account

At present, beneficiaries can withdraw up to Rs 2 lakh from their NPS account

People chose fixed deposits as their hard-earned money was safely locked-in for a certain period and came with reasonable interest rates and risk-free returns.

For a long time and even now, bank fixed deposits used to be a source of regular income for many, especially senior citizens and retired personnel. The FDs were the first step towards building a corpus for future use. People chose fixed deposits as their hard-earned money was safely locked-in for a certain period and came with reasonable interest rates and risk-free returns.

But with decreasing interest rates, the modern-day investors are willing to take risks for higher returns and also avail tax benefits before investing their money. With decreasing interest rates, which are likely to be slashed further, investors can consider debt funds as an investment option.

Debt funds generate periodic returns for investors by putting their money in bonds and other fixed-income securities. These funds buy the bonds and earn interest income on the money. They are called fixed-income securities as all these bonds have a pre-decided maturity date and interest rate that the buyer earns on maturity. The returns are not affected by the fluctuating market and debt securities are considered as a low-risk investment option.

One can utilise their idle cash from savings accounts to invest in debt funds as an alternative to deposits. Debt funds create capital gains even as interest falls. Debt funds invest in government securities that are likely to benefit in the current scenario of decreasing interest rates. However, while investing one should be vary of their volatile nature as they rise and fall very sharply.

Those looking for long-term investments should opt for dynamic bond funds. These invest in a variety of debt papers, including corporate debt, government securities, certificate of deposits, commercial papers, among others. Investing here gives fund managers the flexibility to blend the portfolio according to changing interest rates.

But for investors with low-risk tolerance debt funds are highly recommended as the returns are usually in an expected range.

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first published:December 26, 2020, 18:55 IST