Best PPFAS Debt Mutual Funds

Parag Parikh Financial Advisory Services manages an AUM of around Rs.24,65,338.68 crore. They spread investments over equity, debt, and hybrid mutual funds. As of 2021, this AMC has nearly 5 MF schemes in these categories. Therefore, being a relatively new entrant into the market, they have a 0.07% stake in the Indian mutual fund sector. 

They have a small variety of schemes available in the debt sector. Moreover, the best PPFAS debt mutual funds have an AUM of Rs.1,294 crore with minimal expense ratios. 

Debt mutual funds, also known as income funds, are those types of MFs that invest in debt securities and bonds. Some debt instruments are treasury bills, government securities, commercial papers, debentures, and certificates of deposits. 

SEBI classifies debt mutual funds in several ways. Classification based on the tenure of securities held in the portfolio is one way. Therefore, they can be classified as short, medium, and long-term funds. Another way is by the fund management strategy such as gilt, treasury, infrastructure debt, and corporate bond funds. 

When browsing the top PPFAS debt mutual funds, investors will come across a few options like liquid MF schemes. Liquid funds are a debt fund category that has a residual maturity of up to 91 days. They are less risky than ultra-short-term funds and carry no exit load. 

In general, debt mutual funds involve a comparatively lower degree of market risk and offer long-term capital appreciation and high liquidity. They are less volatile than equity instruments. Furthermore, there is no taxation applicable to debt mutual funds except for short-term capital gains and long-term capital gains taxes because these funds pay no dividend. 

Taxability

Presently, PPFAS offers around 1 debt mutual fund scheme. Redemption of the best PPFAS debt mutual funds 2023 creates capital gains. These are of two types, as mentioned above. The taxation details are below. 

Short-term Capital Gains Tax: Proceeds on the sale of debt MF units within 3 years is considered as short-term. Any capital gains from debt mutual funds are added to the person’s income and then taxed per the appropriate tax slab. 

Long-term Capital Gains Tax: If debt mutual fund units are sold after three years, profits are applicable for long term capital gains tax. LTCGT is charged at 20% with indexation benefits. 

Apart from these two major tax types, the government also levies a surcharge and health and education cess at 4%. 

Factors to Consider Before Investing

Investing in mutual funds is a risky proposition. Even when investing in the best PPFAS debt mutual funds, it’s necessary to exercise caution. Below are some of the major factors to consider before investing in the best PPFAS debt mutual funds. 

Expense ratio: Every AMC incurs additional expenditure to maintain a mutual fund scheme. They need to pay the fund managers, brokers, and clear taxes. Consequently, the expense is shifted to investors. Hence, AMCs charge an expense ratio. When calculating the returns, a fund house subtracts the percentage of the expense ratio from the return’s percentage. Even the best PPFAS debt mutual funds follow this policy. However, for debt funds, the expense ratio is typically lower than that of equity or hybrid schemes.

Interest rate risk: There exists a correlation between the interest rates and securities which make up debt MFs. If the interest rates go up, the value of bonds issued before the change in interest rate decreases and vice versa.  Debt mutual funds perform best in the case of falling interest rates regime. Short-term debt mutual funds involve little interest rate risk compared to long-term debt MFs. 

Risk appetite: While debt mutual funds are not as high risk as equity-based MFs, there is associated risk. An investor should analyse his/her risk appetite before taking on any investment. 

Duration: Another important factor about the best PPFAS debt mutual funds is the duration of the debt mutual fund scheme. The longer the term, the greater is the interest risk. As explained above, bond markets fluctuate inversely with interest rates. In the long run, interest rates are expected to change drastically. Hence, short-term debt mutual funds show lesser exposure to interest risk. 

Credit rating of portfolio components:  Securities are rated with credit ratings to gauge a bond issuer’s ability to repay the interest along with its principal. All debt securities are exposed to credit risk, which is often termed as a permanent risk. Hence, to avoid this type of risk, it is necessary to check the credit ratings of a mutual fund’s components. 

Size of AUM: Debt mutual funds with a larger AUM can spread their fund expenses across investors more thinly. A larger pool of investors sharing any fund expense lower the expense ratio considerably. Moreover, there is also a greater advantage in negotiating with all bond issuers. 

In conclusion, debt mutual funds are a good investment offering low risk and high liquidity. Investing in the best PPFAS debt mutual fund may create long-term capital appreciation or short-term stable gains. However, investors should be aware of the risks. Any investment has its associated risks, which should be studied in depth.