In India, most first-time investors in mutual funds are introduced to the sector through the equity fund route, which is relatively risky compared to debt funds. However, logically these investors should first invest in debt funds, that too in liquid funds which give slightly better returns than savings bank rates.

After they get a taste of liquid funds and understand the advantages and disadvantages of these schemes, the next step should be to invest in short-term funds, fund house officials and financial planners say. Then they should invest in income funds, followed by balanced funds, a mix of debt and equity. Only when they understand the working of debt funds and, to some extent, that of equity funds, investors should put their money in diversified equity funds and other equity schemes. And even when they know about equity funds, part of their corpus should be in debt funds, financial advisers said.

The thumb rule is that the percentage equal to your age should be invested in debt instruments. So if your age is 30 years, 30% of your corpus should be in debt instruments, including debt funds.

Investors who are used to investing in bank FDs and RDs can also look at debt funds because of some of the inherent advantages, like better returns and tax efficiency, nearly the same level of liquidity and also diversification.

Here are the types of debt funds available to investors. The accompanying table gives investment horizons and investment suitability:

Liquid Funds:

Also called money market funds, they invest in treasury bills, call money, banks' certificates of deposit, commercial papers, etc, which are short-term instruments.

Ultra Short-Term Funds:

These schemes invest in debt instruments which have maturities of about a year and, hence, offer return that is slightly higher than liquid funds.

Short Term Funds:

These funds also invest in instruments with about one year maturity and are less volatile in nature than long term funds.

Income Funds:

Also called long term funds, they usually invest in debt instruments with maturity of more than a year. Some funds, however, also invest in short-term instruments to lower volatility in their portfolio. In these funds while the chance of volatility is higher, there are higher chances of capital appreciation in times of falling interest rates. Long-term investors who have the capacity to take higher risks can consider investing in these funds.

Gilt Funds:

As the name suggests, these funds invest only in government securities. They have higher interest rate risks.

Dynamic Bond Funds:

These are debt funds which are actively managed, and have corpus invested in debt instruments across maturities.

Monthly Income Plan:

These schemes aim to distribute part of their monthly gains, if any, to investors. A major part of the corpus of these funds is invested in debt instruments while some part is in stocks.

Fixed Maturity Plans:

These schemes, closed-ended in nature, offer returns which are almost assured at the time of investment.

Although debt funds are relatively safer investments than equity funds, financial planners and advisers say that before investing in these funds, you should look at tax implications for your investments and also compatibility with your risk-taking ability. Also, there are two related issues to keep in mind: Price risk and reinvestment risks. Price risk is in case there is a downgrade or a rise in the rate of interest in the economy, the price of the debt instrument will fall, leading to a loss in the portfolio. Re-investment risk is the risk of getting a lower rate of interest when the current investments mature and you need to re-invest them.

1.ICICI Prudential Tax Plan

2.Reliance Tax Saver (ELSS) Fund

3.HDFC TaxSaver

4.DSP BlackRock Tax Saver Fund

5.Religare Tax Plan

6.Franklin India TaxShield

7.Canara Robeco Equity Tax Saver

8.IDFC Tax Advantage (ELSS) Fund

9.Axis Tax Saver Fund

10.BNP Paribas Long Term Equity Fund

You can invest Rs 1,50,000 and Save Tax under Section 80C by investing in Mutual Funds

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