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Debt mutual funds are suitable for investors who are conservative, not active in the market and require regular income. The debt mutual funds not only provide regular income, but they have various advantages over equity investments and other fixed investments.
Some of the advantages of debt mutual funds are:
They are less volatile than equity markets. The debt mutual funds invest in debt securities, where interest income is regular and prices are relatively stable
They are liquid as compared to fixed deposit as investors can invest and withdrawal, fully or partially, at any time. However, fund houses levy exit load just like fixed deposits
Debt mutual funds are more flexible than fixed deposits. An Investor can choose to change to other schemes, like from a debt fund to an equity fund, in same fund house
The return on debt mutual fund is usually more than Bonds, Fixed Deposits and G-Securities. Changes in interest rates impact the price of bonds. Long-term bonds are more rate sensitive, unlike short-term bonds. Any interest rate cut, eventually shoots up the long-term bond prices, resulting in capital gain to investors
After three years of investments, a long-term capital gains tax is levied on debt funds at either 10% without indexation or at 20% with indexation. Indexation is adjusting investments for inflation for holding period. The longer the hold period, the higher the benefit of indexation
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