Debt fund is a mutual fund which invests most of the money gather from investors into fixed income instruments like corporate bonds, government bonds (both state and central), bonds issued by banks, certificate of deposit, treasury bills etc.
Advantages of investing in debt funds:
1.Debt funds are best option for an investor with low risk appetite.
2.Help fund houses to bring in stability in the portfolio for diversification of mutual funds.
3.Debts fundare highly liquid which can be easily converted in to cash that too within a day time.
4.No deduction of taxes or TDS on the earning from debt funds. Taxes to be paid only when an investor sell or withdraw fund units and depending on period of the investment.
5.Provide better returns on investment as compared to bank FDs and parking surplus money in savings account.
6.Debt fund has low transaction cost as compared to the other mutual fund.
Disadvantages of investing in debt funds:
1.Return on investment is very low as compared to equity mutual funds.
2.While it is true to say that debt funds are relatively safer than equity funds, but they are not risk free like the way bank fixed deposits (FDs) are. The risk in debt funds comes from different sources and three most important risks are change in interest rate risk, credit risk and lack of liquidity. For further detail, check on: https://groww.in/questions/are-debt-funds-safe
3.Due to presence of various debt funds it often become very confusing for a new investor to find suitable debt fund for investing.
4.As these debt funds are managed by the professionals from fund houses, individual investors are left with no control on their day to day activities.
5.Debt funds are associated with extra costs like transaction cost, salary for fund manager, marketing cost etc.
So, debt funds are best suited for investors with surplus amount of money lying idle with them and interested in earning better returns than normal saving accounts or bank FDs with very low risk appetite risk.
Happy Investing!
