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BFSI Chronicle, 11 Edition September 2022
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a) Credit Risk: This is default risk of issuer not In short, we can say major advantages of investing
paying principal and interest in debt funds are low-cost structure, relatively stable
b) Interest Rate Risk: this is effect of change in returns, relatively high liquidity and reasonable
values of securities in the scheme. safety. It is not easy to identify the right type of bonds
c) Liquidity Risk: independently. The ratings of bonds help you choose
them. When creating a portfolio of bonds or NCDs,
Returns: you need to know about them well. On the other
Debt fund returns are lower than equity and hybrid hand, if you invest in a debt fund, you get a ready
funds .NAV changes with the change in interest portfolio managed on your behalf by a qualified
rates, increase in interest rates decrease in NAV and fund manage
vice a versa.
Bonds/Debentures verses Debt Mutual Funds
Advantages of investing in Debt Mutual Fund
WE can compare bonds/debentures and debt mutual
Liquidity funds on certain financial parameters and these are
Unlike traditional investments like PPF, NSC, RBI as under
Bonds, Sukanya Samruddhi, debt funds are quite
liquid s since having no lock in period, and are easily Returns:
redeemable with applicable exit loads. redeemed at Bonds provides fixed returns to the investor as
any time subject to applicable exit loads. Debt funds the promised interest rate isn’t affected by market
are considered to be liquid as they can be withdrawn fluctuations. However, in case of debt funds there is
on any business day. no assured return. Here the returns depend on the
current market price of the underlying bonds which
Tax effi ciency depends on change in interest rates.
Debt funds can be more tax efficient than traditional
debt investment options. There is no deduction of Liquidity:
TDS, however tax is applicable only when redeemed. Open-ended mutual funds are easily redeemable as

The dividend received from debt funds is taxable in such whenever you need the money you can redeem
the hands of the investor according to the investors the same. Whereas bonds come with a fixed tenure,
tax slab. If the units of the scheme are held for less and you can redeem them on maturity. Some are
than 3 years, then any gains are calculated as STCG listed in the debt market on stock exchanges.
(Short Term Capital Gain) and are taxed as per an
individual’s tax slab whereas if they are held for more Risk:
than 3 years then the gains will be calculated as LTCG Bonds always promise fixed pay-outs at fixed
(Long Term Capital Gain) and will be taxed at 20% time intervals. They also return the principal
with the benefit of indexation.Top of Form amount on maturity at the end of the predetermined
tenure. In short bond do not carry risk if held till
Stability maturity whereas debt mutual funds do not promise
Debt Mutual Funds are relatively less risky than any return as such you need to invest in Debt Mutual
equity mutual funds hence are returns more stable funds by calculating the risk-return reward.
and suitable for the people who are having less
tolerance for the risk. Also generate more returns than How to Choose Debt Mutual Fund?
traditional debt investments. In terms of operation, First decide your investment horizon. This will help
debt funds are not entirely different from equity and you to select the right debt fund suitable to your
hybrid mutual fund. However, in terms of safety of risk tolerance and goal time from available fund
capital, they score higher than these funds. categories.

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