Income funds are a type of debt mutual fund that attempts to provide a stable rate of returns in all market scenarios through active portfolio management. While it is a debt fund, income funds also run the risk of generating negative returns as many scenarios could play out - such as - interest rates may drop drastically, resulting in a drop of the underlying bond prices. It’s even possible that the active fund manager could pick lower-rated instruments that could offer potentially higher returns.
Through active and ‘dynamic’ portfolio management, dynamic bond funds seek to maximize the returns to investors by switching up the investment portfolio depending on market conditions and fluctuations.
The entire point of investing in a liquid fund is to maintain a high degree of liquidity (i.e. convertibility to cash/cash value) in the investment. Securities and instruments that are invested in by liquid fund schemes have a maximum maturity period of 91 days. Usually, only very highly-rated instruments are invested in, through liquid funds. The benefit of these funds is primarily felt by those investors who have surplus funds to park in an income generating investment. The reason these are preferred is that they give higher returns than savings accounts and attempt to provide a similar level of liquidity.
These funds are the riskier type of debt mutual funds. They undertake calculated risks like investing in lower-rated instruments to generate potentially higher returns. Anticipating a rise in ratings of papers through market analysis, credit opportunities fund managers invest in instruments rated under even “AA”, in the hope that they will rise to become higher-rated over time, and thus, increase in value.
These fund schemes are popular among new investors who want a short term investment with minimal risk exposure. The securities, instruments, papers, etc. that are invested in by these schemes have a maximum maturity of 3 years and usually a minimum maturity of 1 year.
These schemes invest primarily in government-issued securities which carry a very low level of risk and are generally rated quite high (as the default rate is very low and sometimes non-existent). What these schemes lack in risk-taking ability, they more than make up for, in security.
Fixed maturity plans can be closely likened to fixed deposits. These schemes have a mandatory lock-in period that varies depending on the scheme chosen. The investment must be done once, during the initial offer period, after which further investments cannot be made in this scheme. The way in which it differs from FDs is that the returns are not guaranteed, but if they do generate positive returns, they will be most likely higher than any bank FD scheme.
This refers to the time in which you wish to achieve your financial goals through investments. Debt mutual funds have schemes that fit almost any investment horizon - like liquid funds for 3 - 12 months, bond funds for 24 - 36 months, dynamic bond funds for 36 - 60 months, etc.
This is the primary purpose of investing in debt mutual funds, and the factor based on which most people pick their schemes. Despite the fact that debt fund schemes aim at reducing the risk and establishing regular returns, nothing in the world of mutual fund investing in guaranteed.
Debt mutual fund schemes are also liable to be charged capital gains tax. Short Term Capital Gains (STCG) Tax is applicable to capital gains earned on a scheme that’s been held for 3 years. Long Term Capital Gains (LTCG) Tax is applicable for capital gains earned on a scheme that’s been held for over 3 years.
The primary benefit of debt funds is the extremely low risk to which they expose their capital. Even so, debt schemes are not risk-free - suffering from two very distinct and real types of risk. Credit risk, for example, is when the fund manager invests in securities and instruments with a low credit score/rating - exposing the investment to a high probability of default. Interest risk is another very real risk of debt funds wherein an increase in the interest rates would drastically lower the value of related bonds.
Debt mutual fund schemes are often seen as an alternative investment to fixed deposits - as they provide income over time. Fixed deposits usually have mandatory lock-in periods and/or take a long time to process withdrawals when an investor wishes liquidate the investment. Debt mutual fund schemes, especially liquid funds, have a high degree of liquidity and investors can ‘cash out’ their investment far more quickly than most other comparable investment options.
While it is true that long-term and short-term capital gains tax does apply on debt mutual fund schemes, it should be noted that the benefit of indexation increases after three years of holding and with each passing year after that. Also, debt schemes are not affected by TDS. Alternative investment options like fixed deposits have a straight deduction of 10.3% if the interest income exceeds Rs.10,000 in a single year. The income on fixed deposits is also taxed every year from the start of the deposit, but the total money earned will only be accessible on plan maturity.
Money that’s been invested in a debt fund scheme can often easily be transferred to an equity scheme or any other scheme of the investor’s choosing. Alternative investment options do not provide this level of flexibility to investors - e.g. fixed deposits can only be opened or closed, not transferred.
When compared to the traditional options like savings bank accounts or fixed deposits, debt mutual funds offer the possibility of far higher returns.
|SCHEME NAME||1-YEAR RETURNS||3-YEARS RETURNS||5-YEARS RETURNS|
|Aditya Birla SL Floating Rate Fund(G)||7.92 %||8.09 %||8.43 %|
|Aditya Birla SL Savings Fund(G)||8.05 %||8.09 %||8.50 %|
|ICICI Pru Savings Fund(G)||7.56 %||7.84 %||8.31 %|
|UTI Treasury Advantage Fund-Reg(G)||7.49 %||7.73 %||8.21 %|
|Aditya Birla SL Corp Bond Fund(G)||7.73 %||7.91 %||8.70 %|
|Axis Banking & PSU Debt Fund(G)||8.18 %||7.85 %||8.23 %|