Are you planning on making investments, but are not sure of the best path to follow? Debt funds are a good investment platform which give you a variety of choices. Let us first understand what they mean and the types of debt mutual funds available.

The Meaning of Debt Funds

Suited for those with an appetite for risk, this is an investment pool of short and long term bonds. The core holdings are fixed income investments. You can opt for government issued securities like the gilt funds, monthly income plans, and fixed maturity plans. You also have options to select 3 to 6 months of short term funds like treasury bills, or 15 to 20 years of long term funds.

The Meaning of Liquid Funds

Liquid funds are also a type of debt fund. These funds allow you to invest for a minimum of 1 day to a maximum of 91 days. If you have surplus capital for a limited time frame, then you should definitely opt for liquid funds. These funds are not too volatile and also provide easy liquidity. In fact, you can use this as an alternative to a savings account as it provides much better returns.

Liquid Funds vs Debt Funds

So, should you choose liquid funds or regular debt funds? In order to make the right choice, let’s take a look at the differences between debt funds and liquid funds.

Types: Liquid funds are a type of debt fund, whereas debt funds contain many different varieties of options.

Portfolio: If you opt for liquid fund investments, then the maximum maturity you will get is 91 days. If you choose to mix your debt fund types, then the maturity dates could range from a few months, to a few decades.

Net Asset Value: NAV is calculated for all 365 days for liquid funds, but only on business days for other debt funds.

Risks: Liquid funds are low risk, with near constant interest rates through the maturity term. On the other hand, debt funds are high risk and the volatile market impacts interest rates, making them fluctuate throughout the term.

Mutual Fund Units Allotment: If you place an order of liquid funds before 2 pm, then you’ll be allocated units depending on the previous days NAV. For debt funds, if you submit an investment amount of up to INR 2 lakhs before 3 pm, then the end of day NAV is used to make allocations. However, if the amount is higher, then the allocations will be made on the basis of fund realization.

Returns: The returns from liquid funds will be stable, but probably not high. The return for debt funds is directly dependent on the current state of the economy. If the market is doing well, then your yield could be quite handsome.

Taxation: Liquid fund taxation amounts to zero for dividend paying investors. The fund houses pay dividend distribution tax at 28.325%. Debt fund taxation comes to 20% after indexation.

Liquidity: Liquid funds get their name from the incredible liquidity they provide to the investors. Debt funds are not as highly liquid in nature.

As an investor, choosing between liquid funds and other debt funds will depend on your financial needs, your current capital, and your desire to take risks. Carefully take these factors into consideration when planning your financial future, either alone or with the help of a financial institution like Bajaj Finserv who offer expert wealth management services through their website.

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