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Mutual Funds: How good are debt mutual funds for long term investment, what things to keep in mind before investing in them

Debt funds may suit your long term investment goals but choose them carefully

There is often a misconception among mutual fund investors that investing in equities is the right way to meet long-term financial goals and debt funds for short-term financial goals. But experts say that debt funds can also prove to be effective in meeting long-term financial goals.

Actually diversification of his investment is very important for any investor. But investors do not understand its importance in the initial phase of their investment. For most retail investors, diversification means investing in PPF or FD. But debt mutual funds have their advantages over FDs and corporate bonds. FDs (Fixed Deposits) and Corporate Bonds have their own risks. If the bank goes bankrupt, your money will sink. You will get only up to five lakhs (under deposit insurance). But the advantage of debt mutual funds is that you get the option of diversification in a single fund.

Advantages of Debt Mutual Funds

Taxes are levied on maturity of fixed deposits. Similarly, income earned after holding debt mutual funds for three years is taxed at 20 per cent. However, it has the advantage of indexation. In this, the tax rate is adjusted against inflation. If the debt fund is in long term securities, then it is more prone to interest rate fluctuations.

Experts believe that investors should not invest in debt funds with maturity duration of more than 3 to 5 years. Debt funds with tenures of 3 to 5 years are less prone to interest rate volatility. Along with this, the diversification of the fund should also be taken care of. If a fund has 50 to 60 underlying papers, it will be even better. You should see that the people who are getting money through the fund i.e. the companies which are taking the loan should be at least 30 to 40 and the weightage of none of them should be more than 5-10%.

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Where to invest in Long Term Debt Funds?

If you want to invest in long term debt funds i.e. with a maturity period of 3 to 5 years, then the fund should be chosen carefully. In such a situation, the best banking, PSU and corporate bond funds can be. It is mandatory for these funds to invest in high-quality funds i.e. commercial papers or similar debt papers. Apart from this, they can also increase or decrease the duration depending on the performance of the fund. Gilt Funds also come under the category of Long Term Maturity Funds but they can fluctuate a lot. If you want to invest in Gilt Fund then you should also invest in Banking PSU and Corporate Bond Fund for balance.

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Nisha Chawlahttps://www.businesskhabar.com/
She is an expert in Banking, Finance and working with an international bank. She sharing her ideas and knowledge with Business Khabar.
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