Following are main features of Debt Instruments:
- Fixed Interest
- Fixed Maturity
Debt mutual funds invest in fixed income instruments like FD
Debt mutual funds invest in fixed income instruments like FD, Debentures, Bonds, Treasury bills, Certificate of Deposit, Commercial Paper, Govt. Securities etc.
Taxation, almost tax free
Taxation, almost tax free. Below 3 years it is considered as Short term capital gain and above 3 years it is considered as long term capital gain. Short term capital gain is taxable as per tax slab of a person and Long term capital gain is 20% above inflation. From 2012 – 2015, FD interest was 9% and inflation 10%, no capital gain, no tax.
Debt funds have products varying from 1 day
Debt funds have products varying from 1 day to as long as 10 yr, 15 yr, 20 yr.
Their purpose is to park idle funds, wherein currently customer is getting around 7% interest vis a vis 4% in saving account and Zero in Current Account.
As name suggests they have a Fixed date of maturity and tend to give an expected rate of return on maturity.
These are open ended funds with average maturity of 1 year to 1.5 years. Their purpose is to give normal market rate of return around 50 basis points above bank FD, without much risk of interest rate fluctuations.
These funds are used to take benefit of interest rate fluctuations expected in future. But the same feature makes them riskier as well. These funds are not of much usage in India as financial literacy is too low here.