Debt funds have always been a popular option for many who are building their wealth. It may not be as well-known as the stock market, but it can be a good investment in the long run if you know how to make risky but rewarding decisions. From debt mutual funds to simple debt investment, getting into “debt” is not all bad if you handle money in the right way.
What is it, and what to expect from it?
A debt fund uses your money to invest in fixed-interest securities such as corporate bonds. It is a fund that gives a monthly income from a trust deed investment portfolio. The portfolio is managed professionally, with the main focus on investing in the real estate lending market. It means you will be going into debt as an investment, lend the money to borrowers, and get a fixed-interest monthly rate.
What should you watch out for?
There will always be risks when investing your money into something. For example, there will always be a risk of investing in cryptocurrency or placing your money in the stock market. It all depends on your appetite for it. You do not have to have a high-risk tolerance with a debt fund because most are investing in fixed-interest securities. But there will still be other forms of risk.
You have to watch out for the credit risk because the borrower could end up defaulting, and there will be a lot of paperwork to get the money back. There could also be an interest rate risk where some funds do not have a fixed one, so you have to be prepared if the interest rate is low. And lastly, there is a liquidity risk as well. You can learn all about these risks if you hire the right investment manager.
You should also take into consideration the records of the find itself. You have to do your research when it comes to investing, regardless of what type of investment you will be going for. Even if it is the most secure of debt funds, you never know what will happen. So, take your time to look for historical returns or ask the manager to see the fund’s performance over the past few years.
Will you get taxed?
It will depend on the debt fund you are signing up for. Corporate bonds, for instance, will have taxes added, but they will not be as high as other types of investments. Moreover, it could also depend on how long you are in debt. If you have been investing your money in the fund for a few years, it will be considered short-term capital gains.
On the other hand, long term capital gains also have a specific tax percentage. You may want to consult with your investment manager ahead of time to know what you will be taxed for so you will not be surprised when it is time to pay your taxes. You must always consult your investment manager when venturing into debt funds from reinvestment to distributions and targeted returns.
These are some things you need to know before you decide to try to go for debt investment. Of course, your money will be invested into the real estate lending market, and with the continuing boom of the real estate industry, you can expect significant gains regardless. So, ensure your due diligence when researching debt funds.Email This Post