Investing in debt mutual funds: Things to consider before you invest in them

The interest rate has been falling creating a precarious situation for the senior citizens and retirees. Fixed-income investments are providing low yields and thus retirees are finding it difficult to manage their regular income needs.

- Sanjeev Puri

In such a falling interest rate scenario, parking money in debt funds is an option that many investors consider for effectively high post-tax returns. An investment in the debt asset class is considered to be safer when compared to other asset classes especially when put side-by-side of equities. To a large extent, this is true, as returns in equities are more volatile than debt assets. This lower volatility brings in perception of safety to debt assets such as debt mutual funds. However, this may not always hold water and one need to be aware of the risks involved in investing in debt funds.

Even though the returns in debt funds may be impacted in short term, the returns over the medium to long term may still be adequate to beat bank fixed deposit returns, especially after taxation and indexation.

Where do debt funds invest

In debt funds, your investments are not affected by equity market volatility. Debt Mutual Funds invest in a range of interest-bearing instruments such as Treasury Bills, Government Securities, Corporate Bonds, Money Market Instruments, and other debt securities. Generally, debt securities have a fixed maturity date & pay a fixed rate of interest.

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