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When it comes to investing, many people are familiar with the stock market, but fewer understand the world of debt funds. Debt funds, a type of mutual fund, can be an excellent addition to your investment portfolio, offering benefits like regular income and lower risk compared to equities.
However, there are many misconceptions and myths surrounding debt funds that can lead to confusion.
In this article, we’ll debunk these myths and provide you with a clearer understanding of what debt funds really are, how they work, and why they might be a good option for both short-term and long-term financial goals.
Let’s dive in and separate fact from fiction when it comes to debt funds.
Table of Contents:
- Debt Funds Are Exactly Like Bonds
- Debt Funds Are Only for Retired People
- All Debt Funds Are the Same!
- Debt Funds Are Cheap
- Debt Funds Carry No Risk, Especially Gilt Funds
- Debt Funds Are Useless; One Should Stick to Bank Fixed Deposits, Especially for Older People
- Indians Invest Heavily in Debt Funds
- It Is Easy to Build a Debt Fund Portfolio
- Debt Funds Are for Short-Term Investments Only
- Debt Funds Are Completely Safe Because They Invest in Government Securities
1. Debt Funds Are Exactly Like Bonds
Do you think debt funds and bonds are the same? Well, they’re not! If you can buy a government bond today that gives you 9% return for 20 years, that’s a fantastic deal. Bonds like this can be great because they’re predictable. But debt funds, which are collections of various bonds and other debt instruments, don’t always offer such consistent returns over long periods.
2. Debt Funds Are Only for Retired People
Do you believe debt funds are only for old folks? Think again! Even if you’re 45, investing in a long-term debt fund makes sense. You can invest in it now and redeem it when you retire, providing a stable return over the years.
3. All Debt Funds Are the Same!
Do all debt funds look the same to you? They’re actually quite different! If you need to park money for a few days, a short-duration fund like a liquid fund is best. But if you’re saving for retirement 30 years away, you’d choose a long-term fund like an income or gilt fund. Your choice depends on how long you plan to invest, how much risk you can handle, and where interest rates are headed.
4. Debt Funds Are Cheap
Think debt funds are always cheap? Not really! You need to watch out for costs. Some debt funds can have high fees that eat into your returns, so always check the expense ratio before investing.
5. Debt Funds Carry No Risk, Especially Gilt Funds
Do you think debt funds are risk-free? Not true! Debt funds have two main risks: default risk (some bonds in the fund might fail to pay back) and interest rate risk (the value of the fund can go down if interest rates go up). Even government-backed gilt funds can lose value if you sell before maturity. But if you hold individual government bonds to maturity, you won’t lose money in a nominal sense.
6. Debt Funds Are Useless; One Should Stick to Bank Fixed Deposits, Especially for Older People
Are bank fixed deposits better for older people? Not necessarily! Debt funds can be a great way to defer taxes. With a bank deposit, you pay taxes on the interest every year. But with a debt fund, especially if you choose the growth option, you only pay taxes when you sell the fund, which can be more tax-efficient.
7. Indians Invest Heavily in Debt Funds
Do you think all Indians love debt funds? It’s a mixed bag. Many Indians prefer bank deposits, post office schemes, and LIC policies. However, a lot of the money in mutual funds actually comes from businesses, which park their funds in liquid funds and fixed maturity plans.
8. It Is Easy to Build a Debt Fund Portfolio
Think building a debt fund portfolio is easy? Think again! Creating a dynamic bond portfolio is challenging, especially in India where there aren’t enough bonds available. It can be quite a headache to manage!
9. Debt Funds Are for Short-Term Investments Only
Do you think debt funds are just for short-term goals? Nope! They’re also good for long-term investments. Depending on your financial goals, you can choose between short-duration and long-duration debt funds.
10. Debt Funds Are Completely Safe Because They Invest in Government Securities
Are debt funds completely safe? While many invest in government securities, which are low-risk, they can still be affected by interest rate changes. This means their value can go up or down, so they’re not entirely risk-free.
Remember, choosing the right investment depends on your financial goals, risk tolerance, and how long you plan to invest. Understanding these points can help you make better decisions with your money!
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