What are the advantages and disadvantages of investing in debt funds? - Groww (2024)

Debt fund is a mutual fund which invests most of the money gather from investors into fixed income instruments like corporate bonds, government bonds (both state and central), bonds issued by banks, certificate of deposit, treasury bills etc.

Advantages of investing in debt funds:

1.Debt funds are best option for an investor with low risk appetite.

2.Help fund houses to bring in stability in the portfolio for diversification of mutual funds.

3.Debts fundare highly liquid which can be easily converted in to cash that too within a day time.

4.No deduction of taxes or TDS on the earning from debt funds. Taxes to be paid only when an investor sell or withdraw fund units and depending on period of the investment.

5.Provide better returns on investment as compared to bank FDs and parking surplus money in savings account.

6.Debt fund has low transaction cost as compared to the other mutual fund.

Disadvantages of investing in debt funds:

1.Return on investment is very low as compared to equity mutual funds.

2.While it is true to say that debt funds are relatively safer than equity funds, but they are not risk free like the way bank fixed deposits (FDs) are. The risk in debt funds comes from different sources and three most important risks are change in interest rate risk, credit risk and lack of liquidity. For further detail, check on: https://groww.in/questions/are-debt-funds-safe

3.Due to presence of various debt funds it often become very confusing for a new investor to find suitable debt fund for investing.

4.As these debt funds are managed by the professionals from fund houses, individual investors are left with no control on their day to day activities.

5.Debt funds are associated with extra costs like transaction cost, salary for fund manager, marketing cost etc.

So, debt funds are best suited for investors with surplus amount of money lying idle with them and interested in earning better returns than normal saving accounts or bank FDs with very low risk appetite risk.

Happy Investing!

What are the advantages and disadvantages of investing in debt funds? - Groww (2024)


What are the advantages and disadvantages of investing in debt funds? - Groww? ›

Considered to be less risky than equity investments, many investors with a lower risk tolerance prefer buying debt securities. However, debt investments offer lower returns as compared to equity investments.

What are the disadvantages of debt funds? ›

Returns May Be Lower: The flip side of stability – returns might not be as high as the stock market's rollercoaster, but hey, you won't lose sleep either. Interest Rate Risk: When interest rates change, the value of your debt fund can dance to their tune.

What are the advantages of debt funds? ›

Debt funds are also referred to as Fixed Income Funds or Bond Funds. A few major advantages of investing in debt funds are low cost structure, relatively stable returns, relatively high liquidity and reasonable safety.

Is it advisable to invest in debt funds? ›

Conclusion. Debt Funds can be a wise choice if you want to diversify your investment portfolio. Not only do they offer stability but they also have the potential for returns.

Is debt fund better than FD? ›

Unlike FDs, debt funds do not give assured returns. Returns of debt funds are market linked. Historical data suggests that debt funds have usually outperformed FDs of similar tenures.

Do debt funds give monthly income? ›

Monthly Income Plans, abbreviated as MIPs, are hybrid mutual funds with a debt orientation, offering investors a fixed monthly return. While the equity investment proportion is relatively low, it provides an incremental advantage to the stability of the fund's debt component.

Can I withdraw money from a debt fund? ›

You can generally withdraw money from a mutual fund at any time without penalty. However, if the mutual fund is held in a tax-advantaged account like an IRA, you may face early withdrawal penalties, depending on the type of account and your age at the time.

What are the pros and cons of investing in debt? ›

What are the pros and cons of debt financing? Pros of debt financing include immediate access to capital, interest payments may be tax-deductible, no dilution of ownership. Cons of debt financing include the obligation to repay with interest, potential for financial strain, risk of default.

How to use debt to make money? ›

Debt Recycling

Debt recycling is where, as you pay off your home loan, you redraw the equity you have built up to invest in shares or other property; again, the bad debt becomes a good debt that can earn you an income and can be used to pay back the loan, as well as providing tax breaks.

Why would you invest in debt? ›

They are an alternative option to equity securities, such as stocks, and are generally considered safer investments. Debt securities, such as bonds, can be a good way for investors to diversify their portfolios.

How long should you invest in debt funds? ›

Patel says, "There is no fixed time frame. However, debt mutual fund investors would benefit if they held the investments until the interest rate bottoms out. It could take 1-2 years or more."

Is it a good time to invest in debt funds in India? ›

Debt mutual funds invest in various types of debt securities. So, ideally, the best time to invest is when interest rates are falling or are expected to decline. When the interest rates are going down, the bond prices rise, and consequently, the NAV of debt funds also increases.

Can debt funds give negative returns? ›

Debt mutual funds are considered to be relatively less volatile than equity mutual funds. While this may be true, especially over a long time, the probability of negative returns cannot be ruled out in the shorter term.

Which debt fund is safest? ›

In fact, it is advisable to invest in short-term debt funds for your near-term goals, as the value of long-duration funds is likely to fall more when there is an increase in interest rate. Which debt funds are safe? Overnight Fund is the safest among debt funds.

Which debt fund gives the highest return? ›

1) DSP Credit Risk Direct Plan(G)

The DSP Credit Risk Direct Plan(G) has given an annualised 1-year returns of 17.18%. This fund is a mix of high yielding and lower-rated debt securities and it invests in debt instruments across different credit ratings, with at least 65% in AA and below rated securities.

Are debt funds tax free? ›

For instance, unlike fixed deposits, debt mutual funds are only subject to taxation when the investments are sold. Therefore, it can help you in deferring taxes.

What is the risk of debt funding? ›

With debt financing, you risk defaulting on the loan and damaging your credit score. With equity financing, you risk giving up ownership and control of your business. Cost: Both debt and equity financing can be expensive. With debt financing, you will have to pay interest on the loan.

What are the risks of private debt funds? ›

First, companies that tap the private credit market tend to be smaller and carry more debt than their counterparts with leveraged loans or public bonds. This makes them more vulnerable to rising rates and economic downturns.

Are debt funds high risk? ›

Medium, Medium to Long, and Long Duration Funds

These funds invest in short and long-term debt securities of the Government, public sector, and private sector companies. They tend to do well when interest rates are falling but underperform when rates are rising. Thus, they carry fairly high-interest rate risk.

What are the pros and cons of debt financing? ›

The advantages of debt financing include lower interest rates, tax deductibility, and flexible repayment terms. The disadvantages of debt financing include the potential for personal liability, higher interest rates, and the need to collateralize the loan.


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