Hello Readers! 

Recently the Reserve Bank of India, announced that retail investors can buy government securities directly. However, as per experts, investing in debt funds instead of buying bonds from the market is still the best option. And there are several reasons to support their suggestion. 

Let us have a look at these reasons. 

Funds Help In Diversification!

Diversification helps you reduce risk from your portfolio. It just balances out your loss from one fund with the profit of the other one, simply it balances the risk in your portfolio, but still, investors underestimate diversification. If you remember, then recently we saw that even AAA-rated bonds can deteriorate. This category fund can also default in paying timely interest and principal. The big matter here is investors understand this risk scenario after a full-blown credit crisis across multiple companies.

Basically, what experts were trying to make investors understand was that high yields come with credit risks. And that when diversification works for you.

However, the case if you buy bonds directly, you will find it difficult to assess multiple issuers, instead of having a good sum in your hands to invest.

Tax-Friendly Feature Of Debt Funds!

Debt Funds are taxed only at the time when you sell them or redeem them. This is different for bonds. Interest from bonds is added to your income and taxed at your slab. Thus, when you buy bonds and do not require monthly income, then you have eventually welcomed unnecessary tax liability.

But when you invest in debt funds, taxation will work better for you. If units of bond funds or debt funds are held for more than three years, your capital gains are taxed at 20 percent after indexation. This effectively postpones and reduces the tax burden.

Better Liquidity In Debt Funds Compared To Bonds!

Liquidity is a major factor that investors look at before they plan their investment. They analyze liquidity to check how easily they can make an exit from their fund without paying a penalty. In the case of Indian Bond Markets, liquidity here is very low. Investors favor purchasing bonds with a higher interest rate but high yield bonds are also lower-rated and therefore less liquid.

This low liquidity shows its worst condition when macroeconomic situations threaten the economy of the country as it did during the COVID-19 pandemic. In situations like these such bonds can sink.

However, this liquidity is assured in the case of bond funds. Even though after the tragedy that occurred with Franklin Templeton Funds that hit the investor's trust on debt funds, well-managed bond funds from reputed mutual fund houses are still favorable.

So basically, there are various reasons why experts still prefer debt mutual funds more than buying a direct bond investment.

Keep reading for more updates on Mutual Fund Investment!!

For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).