Debt Fund Investment for Salaried
As salaried individuals, we earn, we spend, but do we ever focus on investments? This section of the population has fixed monthly cash inflow based on which they manage savings, meeting expenses and financial goals.
In order to fund the long or short-term goals, there can’t be a better alternative than debt mutual funds to grow your wealth in a steady manner.
Debt mutual fund investment for salaried individuals invest in fixed income securities like treasury bills, government bonds, corporate bonds, commercial papers and other money market financial instruments. Compared to equity funds, debt fund units are less risky and offer lower returns. All debt mutual fund instruments have a pre-defined maturity date and interest rate so that buyers can earn a fixed income in return. The returns are independent of the market fluctuations, unlike high-risk option like equities.
Let’s look at the types of debt mutual funds, available for salaried individuals:
Ultra-short Duration Fund: This type of fund primarily lets you invest in money market financial instruments, including treasury bills, commercial papers, and certificates of deposits. The maturity of Ultra Short Duration funds varied from 3 to 6 months.
Corporate Bond Fund: As a salaried individual, you can invest in corporate bond funds. As per SEBI, corporate bond funds invest a minimum of 80% of the total assets in AA+ and above rated bonds. As compared with government bonds, the yields from corporate funds are better.
Dynamic Bond Funds: These are open-ended funds where you have the flexibility to invest in debt and money market instruments depending on the interest rate, credit quality and other factors.
Gilt Funds: These debt mutual funds are the fixed securities issued by the Central and State Government in India. As per the SEBI regulation, around 80% of the total assets under Gilt Funds need to be invested in government securities.
Short, Medium and Long Duration Funds: All of these debt funds invest in money market and debt fund instruments. The duration of short duration fund ranges from 1 year to 3 years, while for a medium fund it varied from 3 to 4 years, and the maturity of long duration funds is more than seven years.
Credit Risk Fund: The fund invests 8% of the total assets in AA rated papers and below rated corporate bonds.
Liquid Funds: With a maturity of 91 days, liquid debt fund allows you to invest in debt and money market financial instruments.
Banking and PSU funds: As the name suggests, banking and PSU funds invest 80% of the total assets in public sector undertakings, public financial institutions and banks.
Here’s a familiar little story. Two buddies Sanjay and Ramesh bump into each other at the neighbourhood park. As usual, Ramesh complains about pay hikes not keeping pace with inflation and the major amounts he is paying for utility bills like electricity. Ramesh then asks Sanjay how he is managing. So far the story has been predictable. Many of us have the same problem as Ramesh.
Now, imagine a twist in the tale. Sanjay tells Ramesh that he has figured out an investment that pays him enough to pay for a year’s utility bills from surplus others park in bank savings accounts. What do you think Sanjay’s investment was?
Well, if you think we are going to mention stocks or equity funds, the story would become predictable to a certain extent. In any case, it would be inappropriate for a higher risk investment like equities to meet a short-term need. And then, we had set out to give a twist in the tale. Luckily, Sanjay’s investment allows us to give a twist to the story.
Introducing Ultra short term funds Sanjay and Ramesh spend about Rs 36,000 annually on utility bills or Rs 3,000 per month. That’s also what Sanjay earned from Ultra short term funds from an investment of Rs 4 lakh last year, instead of letting his money hibernate in a bank savings account paying 4 per cent annually. Just in case you are wondering what Ultra short term funds are all about, here’s a brief lowdown on them.
As the name suggests an ultra-short term fund invests in highly rated securities of lower maturity. This makes the investment less volatile in nature. In terms of liquidity, it scores high since the money is available at your disposal the very next day after you make a request.
Moral of the story If you are impressed with Sanjay for making his surplus funds work hard to pay for his utility bills, you need to take a close look at Ultra short term funds category. It provides you the convenience of your bank savings account in terms of liquidity with the money available on the day after you place a request. However, it also has the potential to earn higher post-tax returns. Typically, a bank saving account gives you return of 4 per cent annually and that too, taxable.
So, now you have enough information from the story of Ramesh and Sanjay to start a cheerful new story for yourself. Clearly, the smart way of managing money is not just about earning more money but making your money work hard for you too.