Can You Invest in Debt Funds For Long Term?

13 September 2022
3 min read

Debt Funds are Mutual Funds that invest in fixed-income securities like bonds, treasury bills, commercial paper, government securities, etc. They are preferred by investors looking for regular interest income along with capital appreciation.

Generally, Debt Funds provide a stable return but are lower as compared to equity funds. Types of Debt Funds range from ultra-short duration funds to short-term, and medium-term debt funds.

Reasons to Invest in Debt-Funds

By making long-term investments in Debt Mutual Funds, investors can benefit from the following advantages-

  • High Liquidity

One of the key benefits of fixed-income funds is liquidity. Investors can redeem their units at any time after their purchase. The amount will reflect in their bank account within a day.

  • Partial Withdrawals

One can withdraw partially from their funds to meet necessary requirements without impacting the rest of the investment.

  • Flexibility in Investment

Investors can either buy units in a lump sum or choose to invest via SIP.

  • Provides Stability

Since a major portion of the investment corpus is allocated to Debt instruments, the stock market fluctuations mostly do not impact the returns.

  • Tax-Efficient

Debt Funds are more tax-efficient than traditional investment options, such as bank fixed deposits. Income from debt funds is taxed when an investor chooses to redeem his/her units. However, income from bank FD is taxed every year. Debt Funds also attract indexation benefits if sold after 3 years from the purchase date.

Are Debt Funds Really Ideal for the Long-Term?

Well, if you are a seasoned investor, you must be wondering why we’re talking about investing in Debt Funds for a long-term duration. Yes, it’s true that Debt Funds are more suitable for short-term purposes, but some of you are not willing to take the risk. Those investors may consider investing in Debt Funds, as they reduce risk and are relatively stable in nature, as compared to equity funds.

We still suggest that if you have a longer investment horizon, equity funds should be your ideal preference. But if you are a conservative investor and do not want to venture into the equity space, there are Debt Funds that you can consider.

There are Debt Funds that may fit the long-term bill, due to the benefits of indexation, less risk, and stability of income. Some of them have been listed below.

  • Medium Duration Funds

It is an open-ended debt scheme that invests in debt/bonds and money market instruments such that the average maturity period is between 3-7 years.

  • Long Duration Debt Funds

It is an open-ended debt scheme that invests in debt and money market instruments such that the average maturity period is more than 7 years. These funds are sensitive to interest rate changes but are less risky, as compared to equity funds.

  • Gilt Funds

Gilt mutual funds mostly invest in government bonds, which makes them the safest investment. These are preferred by investors looking for maximum safety of their money.

Conclusion

There are a plethora of parameters that need to be considered when investing in a Debt Fund, which will cater to all these needs. Although there is no denying that short-term Debt Funds are more popular, as mentioned earlier, if you think that equity might not be the best option for you, you can consider these funds.

Happy Investing!

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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