Advantages of Investing in a Debt Market

Advantages of Investing in a Debt Market

17 February, 2023

In a study published on market returns and flows to debt mutual funds in October 2022, the Reserve Bank of India (RBI) pointed out a remarkable growth in debt securities in India in the last ten years. There has been a marked increase in the share of debt instruments in corporate debt financing. The deployment of savings by debt mutual funds has also increased from ₹ 3.7 lakh crores in March 2012 to ₹ 12.6 lakh crores in September 2022.

This indicates that corporate borrowers and retail investors have shown an inclination toward the debt market in India. There are several advantages of debt market investments that have increased their importance in the common person's investment portfolio.

Choice - The debt market has a wide range of choices when it comes to the types of instruments, the categories of issuers, and the debt funds available.

  1. Securities - 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.

  2. Issuers - You also have the option of selecting issuers of debt instruments as per your risk appetite and preference. These instruments are issued by the central government, state governments, government entities and bodies, public sector undertakings, corporate entities, banks, non-banking financial companies, and other financial institutions.

  3. Fund types - 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. Investment in longer-term debt securities of one year or more can be made through short-term, medium-duration, medium to long-duration, and long-duration funds. Besides, there are categories like dynamic bonds, corporate bonds, credit risk funds, banking and PSU funds, gilt funds, 10-year constant duration gilt funds, floater funds, and fixed maturity plans.

  4. Wealth preservation - 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.

  5. Regular income - 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 in the form of regular dividends.

  6. Safety - The debt market is ideal for conservative investors who are risk-averse in their investment decisions. While government-issued instruments are entirely safe, even corporate bonds have a preferential claim 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.

  7. Liquidity and flexibility - 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%, in commercial papers from 41% to 89%, and in 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 not only offers a seamless and quick opening process but has 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 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 from 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.

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