A study on market returns and debt mutual fund flows, published by the Reserve Bank of India (RBI) in October 2022, highlighted significant growth in debt securities in India over the past decade. The share of debt instruments in corporate debt financing has seen a notable rise, with investments by debt mutual funds increasing from ₹3.7 lakh crores in March 2012 to ₹12.6 lakh crores by September 2022.
This growth indicates a rising preference for the debt market among corporate borrowers and retail investors alike. The appeal of debt market investments has expanded its role in the average investor’s portfolio thanks to several key advantages.
The debt market offers diverse instruments, issuer categories, and debt funds, giving investors a wide range of options to suit their investment needs. Here are some of its perks.
You can choose to invest in fixed-income securities like government securities (G-secs), State Development Loans (SDLs), treasury bills and cash management bills, commercial paper, Certificate of Deposit (CD), fixed-rate bonds, floating rate bonds, fixed interest debentures, market-linked debentures, tax saving infrastructure bonds, zero-coupon bonds, etc.
You also have the option of selecting issuers of debt instruments as per your risk appetite and preference. The central government, state governments, government entities and bodies, public sector undertakings, corporate entities, banks, non-banking financial companies, and other financial institutions issue these instruments.
If you opt for the mutual fund route, there are different types of debt funds to choose from. It includes overnight funds that invest in debt securities with one-day maturity, liquid funds for securities with 91-day maturity, ultra-short duration funds for three to six months, low duration funds with investments maturing in six to 12 months, and money market funds with maturities up to a year.
Investors can invest in longer-term debt securities (one year or more) through various types of funds, such as short-term, medium-duration, medium-to-long-duration, and long-duration funds. Additionally, options include dynamic bond funds, corporate bond funds, credit risk funds, banking and PSU funds, gilt funds, 10-year constant duration gilt funds, floater funds, and fixed maturity plans.
Debt funds act as the perfect foil for uncertain investments in the equity market, as these funds are largely immune to market fluctuations. When you invest your surplus money in debt funds, you can rest assured about wealth preservation. The fund will generate a steady return even during recessions and market uncertainties. Debt funds remain available to meet your short-term goals and financial emergencies.
Unlike the windfall returns and slowdowns of equity funds, debt funds deliver a regular return. Investments in debt funds can be made to earn a monthly income. For this purpose, investors can invest in a Systematic Withdrawal Plan (SWP) that pays them as regular dividends.
The debt market is ideal for conservative investors who are risk-averse in their investment decisions. While government-issued instruments are safe, corporate bonds have preferential claims over equity investors. Besides, the debt market also helps high-risk-taking investors diversify their portfolios and manage risks better.
This diversification is even useful for investors who invest in less risky stocks. Because of its safety, equity investors invest a portion in the debt market as a hedge against market fluctuations and equity underperformance.
Since debt instruments offer a steady return, investments in debt funds can be redeemed at any time without the fear of a financial loss. If you choose funds with a low exit load, you end up paying minimal or zero charges on debt fund redemption.
Unlike fixed deposits, debt funds generally don't have a lock-in period. Besides, mutual fund investment in the debt market can be made as a lump sum at your convenience. You can also invest regularly by opening a Systematic Investment Plan (SIP). Units can also be transferred from one fund to another through Systematic Transfer Plans (STP).
Apart from the overall popularity of debt market instruments, mutual fund holdings in these instruments have continued to increase. In the 10 years ending March 2022, mutual fund holding in CDs increased from 52% to 90%, commercial papers from 41% to 89%, and T-bills from 3.6% to 14%.
Before you can avail the benefits of investing in the debt market, you should ideally have a Demat account through which you can trade and make investments. HDFC Bank Demat Account offers a seamless and quick opening process and several benefits that will make your investment journey smoother. For instance, you can enjoy hassle-free fund transfers, earn interest on your Savings Account until trades are processed, and access research-backed recommendations, among many other things. So, join 3 million+ HDFC Bank Demat Account holders and leverage the advantages of the debt market for a financially secure future.
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*Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in the securities market are subject to market risks; read all the related documents carefully before investing. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice before you take any/refrain from any action. Tax benefits are subject to changes in tax laws. Please contact your tax consultant for an exact calculation of your tax liabilities.