Best Principal Debt Mutual Funds

Principal Asset Management Private Limited manages the investment for Principal Mutual Fund. Following disciplined risk management and focused fund management strategy supported by thorough economic and credit research, this organisation provides financial solutions for long-term, mid-term and short-term financial goals. As of 31st December 2019, this AMC manages funds at an average AUM of Rs.6601.5 crores.

This AMC currently offers 15+ mutual fund schemes distributed over equity, debt and hybrid fund categories. This includes the best Principal debt mutual funds.

A debt mutual fund is a mutual fund scheme that makes investments in fixed income instruments. These include money market instruments, corporate debt securities, government and corporate bonds, etc. Investments in such sectors substantially lower the risk factor for investors. A comparatively stable investment avenue for generating wealth, debt funds are also referred to as fixed income funds.

There are several options for investing in debt mutual funds, which include monthly income plans (MIPs), gilt fund, liquid funds, fixed maturity plans (FMPs), and short term plans (STPs). In addition to these, debt mutual funds also make investments in various long-term, mid-term and short-term bonds. 

A debt mutual fund is relatively less volatile and offers a low but steady income compared to an equity mutual fund. Low cost structure, reasonable safety, and relatively high liquidity are some other advantages that attract investors to this fund category.

The top Principal debt mutual funds may invest in fixed-income securities, considering the credit ratings of securities, but this usually depends on the scheme type. For instance, a credit risk fund typically invests in low-rated issuer bonds. Nevertheless, a high credit rating implies that an issuer is likely to pay interest timely and repay the principal at maturity.

Currently, there are around 4 debt fund schemes offered by Principal, which offer both regular earnings and capital gains. The sale of the best Principal debt mutual funds in 2023 generates capital gains that are applicable for taxation. The tax rate applied to these capital gains depends on the holding period.

Taxability

Long-term Capital Gains Tax: The capital gains generated from selling an investment of a debt fund after a holding period of 36 months are referred to as LTCG or long-term capital gains. These gains face taxation at the LTCG tax rate, which is currently 20% with indexation.

Short-term Capital Gains Tax: The capital gains generated from selling an investment of a debt fund at a holding period of fewer than 36 months are referred to as STCG or short-term capital gains. These gains face taxation at the STCG tax rate. For debt mutual funds, this taxation is based on the investor’s tax slab. For instance, if the taxpayer is eligible to service taxes at 20%, then the debt mutual fund gains would also attract the same rate of 20%.

TDS: Investors must note that there is no TDS applicable while selling or redeeming these units. While filing income tax returns, investors must pay taxes after showing the income. 

While this taxability section is highly vital for investors, there are some other parameters that they should take note of while making an investment in the best Principal debt mutual fund.

Factors to Consider Before Investing

Expense ratio: Debt fund managers and mutual fund houses charge a certain amount of fees from investors to manage their portfolios. This charged fee is referred to as the expense ratio. 

Experience of the fund manager: The competence of a fund manager in tackling debt schemes can play a vital role in determining whether a debt fund scheme would be profitable for an investor. Competent fund managers make accurate predictions regarding the market and take prompt actions for maximising gains and minimising losses.

Past performance of the fund: Though a fund’s past performance does not indicate probable future outcomes, it is a healthy practice to keep a check on it. This is because the past performance bears the potential of offering valuable insights regarding the market conditions. Knowing whether a market is following a bullish or bearish trend would help make an informed decision. 

Return: Investors must note that although debt mutual funds invest in fixed income securities, they do not guarantee returns. With a rise in the economy’s overall rate of interest, the NAV of these funds tends to decline. Hence, debt funds are ideal for a falling rate of interest regime.

Venturing into the investment domain might prove to be a daunting task for first-time investors. However, having elementary knowledge about debt mutual funds and referring to this article as a guide would help them choose a suitable fund among the best Principal debt mutual funds.