Top 10 Debt Mutual Funds to Invest in January 2022

What are Debt Mutual Funds?

A debt mutual fund is a type of mutual fund that invests in low-risk, low-volatility products such as certificates of deposit, corporate bonds, treasury bills, commercial paper, and government securities. Bond Funds or Fixed Income Bonds are other names for debt mutual funds.

The primary goal of this fund is to deliver consistently and set interest throughout the investment period. As an investor, you should also aim for capital appreciation.

The credit rating is used to choose assets for a debt mutual fund. A higher credit rating indicates that the interest will be paid on time and that the initial amount invested will be reimbursed when the investment matures.

Top 10 Debt Mutual Funds to Invest in January 2022

1. Tata Liquid Fund
2. Axis Liquid Fund
3. Kotak Savings Fund
4. SBI Magnum Ultra Short Duration Fund
5. ICICI Prudential Savings Fund
6. IDFC Low Duration Fund
7. Aditya Birla Sun Life Liquid
8. Nippon India Liquid Fund
9. Aditya Birla Sun Life Liquid Fund Institutional
10. ICICI Prudential Savings Fund Retail Plan

Advantages of Investing in Debt Mutual Funds

The following are some of the benefits of investing in debt mutual funds:

• Debt mutual funds are less risky than equities mutual funds, making them perfect for investors looking for security.
• These funds are extremely liquid, and an investor can convert his investment into cash at any time, which is significantly faster than any other comparable investment option.
• An investor’s money invested in debt mutual funds can easily be moved to equity mutual funds or any other scheme of their choice. Other investment alternatives do not provide such options. For instance, an FD can be closed but not transferred.
• Higher potential gains as compared to savings account interest rates and FD rates.
• Due to diversification, a portfolio is more stable when debt mutual funds are coupled with equity mutual funds.

Who Should Invest in Debt Mutual Funds?

Debt mutual funds are ideal for investors looking for a steady, predictable income with little or no risk over a short period. Typically, investors invest for a short to medium period. As a result, investors select funds that are appropriate for their investing horizon.

A liquid fund is appropriate for investors looking for a short or medium-term investment who prefer to keep their excess funds in fixed deposits or savings accounts. Liquid mutual funds offer returns in the range of 7% to 9% and can be withdrawn at any time, exactly like a savings account.

Taxation of Debt Mutual Funds

Gains from debt mutual funds are taxed as capital gains, depending on how long the investment has been held.

Short Term Capital Gain

If the investment is held for less than three years from the date of investment in the fund, STCG is imposed. STCG is imposed on the capital gain deriving from a debt fund investment kept for less than three years. The capital gain will be added to an investor’s total income, and the tax rate will be determined by the income tax slab rate. The income tax rate is determined by the taxpayer’s net taxable income and age.

Long Term Capital Gain

If an investment is held for more than three years from the date of purchase, it is referred to as long-term capital gain.

The capital gain from an investment in a debt fund held for more than three years is subject to LTCG. After indexation, LTCG is taxed at a rate of 20%.

The effect of inflation on the underlying asset is calculated via indexation. This effect is measured from the time the investments were purchased to the time they were sold.

The purchasing price is raised when indexation is done. This creates a price equilibrium between the purchase and sale prices in terms of inflation. As a result of indexation, the amount of capital gain is reduced.

Things to Consider as an Investor

Risk

Debt mutual funds are not without risk, and investors should be aware of and evaluate these risks when selecting debt mutual funds. Below is a list of the various forms of risk:

• Because interest rates fluctuate in the market, the fund’s value may fluctuate as well.
• Credit Risk refers to the possibility of defaulting on interest and principal payments. The greater a debt mutual fund’s credit score, the more reliable it is.

Cost

The expense ratio is a fee charged by fund houses in exchange for the fund manager’s upkeep of the fund. When compared to peer funds in the category, an investor should choose the fund with the lowest expense ratio.

Investment horizon and objective

Investing in liquid funds for a period of 3 to 12 months is great; however, if you want to invest for a longer duration, you should explore short term bond funds. An investor must also determine the ultimate goal of his investment and choose among the various types of funds based on that goal.