With RBI slashing the repo rates, commercial have reduced their deposit rates in quick succession making fixed deposits a reinvestment risk. Added to that, for individuals falling in the higher income tax bracket, there is the concern of paying high amounts as Income Tax. Fixed deposits have been a safe and secure investment tool for decades in India with the continually fulfilled promise of guaranteed returns. Moreover, fixed deposit accounts have the added benefit of not requiring to be constantly checked on as the market doing badly doesn’t a fixed deposit account.


All that said, an equity mutual fund on the other hand in most people’s opinions need ample amount of strategizing and run a high risk factor as they are directly linked to the health of the market. Added to that a lock in period is required in order to earn any tax benefit on an equity mutual fund.

So what is the solution?

A debt mutual fund!

Debt mutual funds are mutual funds that invest in fixed income securities, thus making them a safe and secure investment tool. Debt mutual funds have a fixed maturity date and pay a fixed rate of interest.

What are fixed income securities?

Fixed income instruments are investment options such as, bonds and treasury bills.

Some commonly known investment options in debt mutual funds are, Fixed Maturity Plans (FMPs), Short Term Plans (STPs), Monthly Income Plans (MIPs), Gilt Funds, Liquid Funds, etc.

In fact, debt mutual funds can be taken for tenures in three categories, namely, short term bonds, medium term bonds and long term bonds.

With systematic withdrawal plans (SWPs) available, debt mutual funds are almost the most perfect solution for retirees who tend to be individuals that do not want to invest in a highly volatile equity market.

Compared to equity mutual funds, debt mutual funds provide the investor with a steady albeit low income while being less volatile.

Returns on debt mutual funds come in two forms, namely,

  • Interest income
  • Capital appreciation/depreciation

Following are a few of the many benefits of investing in debt mutual funds-

  • Debt mutual fund investments are not affected by the equity market volatility
  • Debt mutual funds add stability to an investor’s portfolio
  • They allow investors to withdraw money at will
  • No lock in period
  • Better post tax returns

Here are a few questions to ask before making an investment in debt mutual funds-

  • What is the investment objective?
  • What is the investment horizon?
  • How much risk is one willing to take?

GT1669These questions allow the investor to consider the amount of money that he will require for a certain expenditure which will them allow him to choose an investment amount to meet that requirement. Furthermore, a time period for achieving a goal allows the investor to choose the length of the tenure of the investment. Moreover, depending on the investor’s appetite for risk, a debt mutual fund scheme can be chosen accordingly.

Here are a few things to check in the market before investing funds into debt mutual funds-

  • Will the interest rate rise in the coming term?
  • What is the expected rate of interest trend in the upcoming few years?

Understanding the trend of the interest rate gives the investor a fair picture about the kind of returns he can expect with the amount of investment that he is willing to make. Additionally, it will help the investor to gauge if the debt mutual fund scheme is moving in an upward trend or not.

Instead of investing in fixed deposits and relying on savings accounts, a debt mutual fund is a more relaxed investment for those post retirement years!


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