Debt: the word itself conjures up the image of a moneylender standing on the doorstep waiting for his money. However, debt is not always bad. You may have heard of people ‘being in debt’ but what about ‘investing in debt’? When you make a debt investment, you loan the money to a corporate or the government. In return, you receive returns in the form of interest. If you are interested in tax-efficient steady returns and safety of principal, then debt funds are ideal for you.
Here are five different types of funds that you can include in your portfolio:
Bonds are debt securities issued by government entities and corporate houses. These entities raise money for financial purposes, which include funding investments and enhanced cash flow. When you purchase bonds as investment, you receive a regular income through interest payments. At the end of the maturity period, you receive the original investment made. There are different types of bonds such as government bonds, corporate bonds, high-yield bonds, international bonds and so on.
2) Public provident fund
The Public Provident Fund, or the PPF, has been a popular debt-oriented investment for for the past many decades. This scheme is backed by the government of India and offers a high degree of protection on the principal as well as interest. As an investor, you are guaranteed a fixed return each year. The current rate of interest on PPF is fixed at 7.6% per annum .
PPF is a 15-year scheme. At the time of maturity, you have the option to extend the plan indefinitely in blocks of five years. The investments you make under PPF are eligible for a tax deduction of Rs 1.5 lakh under Section 80C of the Income Tax Act. In addition, the interest you earn is not taxable.
3) National Saving Certificate
National Saving Certificate (NSC) is a savings bond offered by the Indian government. It is one of the safest investment avenues in the country. It is available at all post offices and investors can invest for up to 10 years in this scheme. Currently, the interest rate on NSC investments is 7.8% per annum*. It is popularly used as a tax-saving instrument by government employees, salaried individuals and businessmen.
Further benefits include:
a) Tax deductions are applicable under Section 80C of the IT Act.
b) No upper limit on how much you can invest
c) You can get loans from banks by offering certificates as collateral
4) Gilt funds
Gilt funds are mutual funds that allow you to invest in government bonds and securities. These funds carry zero default risk and they are considered to be very safe. These funds invest in debt that is of low risk and high quality. And while the returns can be moderate, the invested capital is safeguarded against risk. That’s why these funds are suitable for beginners or those who are risk averse.
5) Debt mutual funds
Debt mutual funds are different from gilt funds as they invest in a mix of securities such as corporate bonds, money market instruments, treasury bills and government securities. Compared to gilt funds, the risk is higher but they offer high returns too. If you are interested in earning a steady income during uncertain interest rate movements, you can invest in fixed maturity plans (FMPs). These are close ended debt funds with a fixed maturity date.
Most people think of equities when it comes to investments. However, investments in debt can be a great way to balance your portfolio and to earn steady returns.
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.