Understanding Debt Funds and Risks

What are the main types of debt funds?

• Commodity funds

• Real estate funds

• Equity funds

• Government bond funds, corporate bond funds, municipal bond funds, high-yield bond funds, short-term bond funds.

How do government bonds differ from corporate bonds?

• Government bonds are more volatile than corporate bonds.

• Government bonds are issued by companies and are higher risk.

• Government bonds are issued by governments and are lower risk, while corporate bonds are issued by companies and carry higher risk.

• Corporate bonds are always tax-exempt and have lower yields.

What is the impact of rising interest rates on debt fund returns?

• Rising interest rates increase debt fund returns.

• Rising interest rates generally decrease debt fund returns.

• Debt fund returns remain unchanged with rising interest rates.

• Rising interest rates have no effect on debt fund returns.

Explain the concept of interest rate risk in debt funds.

• Interest rate risk is the risk of loss in bond value due to changes in interest rates.

• Interest rate risk is the potential for increased returns when interest rates rise.

• Interest rate risk only affects equity investments, not debt funds.

• Interest rate risk is the risk of losing principal due to default on the bond.

What role do credit rating agencies play in the bond market?

• They issue bonds on behalf of companies.

• They set the interest rates for bonds.

• They provide insurance for bond investments.

• Credit rating agencies evaluate the credit risk of bond issuers, guiding investors in their decisions.

How can a downgrade in a bond's credit rating affect its price?

• A downgrade in a bond's credit rating makes it more attractive to investors.

• A downgrade in a bond's credit rating typically causes its price to decrease.

• A downgrade in a bond's credit rating typically causes its price to increase.

• A downgrade in a bond's credit rating has no effect on its price.

What are the tax implications of investing in debt funds?

• Investing in debt funds is tax-free after one year.

• Tax on debt funds depends on the holding period: short-term capital gains for less than 3 years, long-term capital gains for more than 3 years.

• Tax on debt funds is always zero regardless of the holding period.

• All gains from debt funds are considered as ordinary income.

How is the interest earned from debt funds taxed?

• Interest from debt funds is taxed at a flat rate of 10% regardless of the holding period.

• Interest from debt funds is taxed as ordinary income only.

• Interest from debt funds is taxed as short-term capital gains if held for less than 3 years, and as long-term capital gains if held for more than 3 years.

• Interest from debt funds is tax-free regardless of the holding period.

What is the difference between short-term and long-term debt funds?

• Short-term debt funds have lower risk and invest in instruments with maturities up to 3 years, while long-term debt funds invest in instruments with maturities over 3 years and carry higher risk.

• Short-term debt funds have higher returns and invest in instruments over 5 years.

• Long-term debt funds are risk-free and always provide guaranteed returns.

• Short-term debt funds invest in stocks and have no maturity period.

How does inflation affect the performance of debt funds?

• Inflation increases the returns of debt funds by boosting bond prices.

• Inflation has no effect on the performance of debt funds.

• Debt funds perform better during inflation due to higher interest rates.

• Inflation negatively impacts debt fund performance by eroding returns and lowering bond prices.