How to Invest in Debt Mutual Funds

28 August, 2024

Synopsis

• Debt Funds are designed for investors seeking lower risk. They primarily invest in fixed-income instruments like bonds and treasury bills, offering stable returns with moderate risk.

• Debt mutual funds are tax-efficient, with gains taxed based on the investor's income slab and capital gains applicable only upon redemption. This makes them attractive for those prioritising stable growth and tax benefits.

• Selecting the best debt fund involves reviewing factors like historical performance, fund manager expertise, and suitability to investment objectives, ensuring informed decisions aligned with risk appetite and investment horizon.

• Using platforms like HDFC Bank SmartWealth App, investors can easily navigate and invest in debt funds online without the need for paperwork, ensuring a seamless and convenient experience.
  
  

Two friends, Varun and Rohit, decided to go for a walk in the nearby park. While strolling, Varun engaged Rohit in a discussion on potential investment avenues.

Varun: I want to start investing but also want less risk than the stock market. I am thinking of investing in debt funds, but I don’t understand them well! Can you tell me: are debt funds a good option?

Rohit: Yes, debt funds are great for investors seeking lower risk!

Varun: Ok, but how to invest in debt mutual funds and can you refer me some smart online platform also?

Rohit: You can consider using the HDFC Bank SmartWealth App for a seamless investment process. I’ll explain the basics of debt funds and how to buy debt mutual funds using SmartWealth .

Varun: Thank you. Since I am a first-timer, please tell me everything you know about debt funds.

Rohit: Let me tell you few features of the debt funds:

• Invest predominantly in fixed-income instruments like corporate bonds, government securities, treasury bills, etc.

• Aims for stable returns by investing in low- to moderate-risk assets.

• Gets higher income stability but lower returns versus equity funds over the long term.

• Best suited for investors looking for regular income in the short to medium term.

• Different types of debt funds cater to varying investment horizons and risk appetites.
  
  

Varun: This means that my money will be invested in avenues other than stocks, right? Can you also explain about the returns and taxation of debt mutual funds?

Rohit: Debt funds aim for stable growth rather than very high returns like stocks; debt mutual funds are tax-efficient too.

• For all holdings, gains are taxed as per investor's income tax slab

• Capital gains tax is applicable only when units are redeemed
  
  

Varun: Stable returns sound good for my cautious approach. But how to choose best debt fund for investing?

Rohit: It's very easy on the HDFC Bank SmartWealth app! Here are a few simple steps that you need to follow:

• Log in to SmartWealth on your phone. Tap on 'Discover' on the homepage. 

• Under 'Explore & Invest', select the Debt Funds tile. 

• Browse top-rated debt funds first, or use filters to find one that suits you. 

• Tap on a fund and analyse details like historical returns, fund manager, etc. 

• When ready to invest, hit 'Add' and go to you cart to complete the transaction 

• The NAV applicable will be based on the business day when the purchase request is processed, as per the cut-off timing Any requests received after the cut-off time will be processed on the next business day. 
  
  

Varun: Smooth! No paperwork or forms are required, right? I can do this digitally.

Rohit: Yes, the entire process is online and paperless! Super quick and convenient.

Varun: Thanks. I am convinced that debt funds are ideal for me. I'll get started right away.

FAQs

Can debt funds give negative returns?

Debt funds can experience negative returns due to interest rate fluctuations. Funds with longer maturities are particularly susceptible to interest rate risks.

Can I withdraw debt funds anytime?

Yes, most debt funds allow withdrawals anytime without incurring an exit penalty. Additionally, you can set up a Systematic Withdrawal Plan (SWP) to automate monthly withdrawals from your funds.

When to choose debt mutual funds?

Debt mutual funds invest in various debt securities, making it optimal to invest when interest rates are going down or anticipated to fall. Falling interest rates typically increases bond prices, increasing debt funds' Net Asset Value (NAV).

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