What are debt funds?
According to the fund’s investment strategy, debt funds are schemes that invest in different types of debt instruments with varying timeframes. Some examples of debt instruments are corporate bonds, money market securities, debentures, treasury billsand government securities. These instruments have a fixed interest rate and timeframe,butthe returns are not assured as they largelydepend on the fluctuations in interest rates.
What are the types of debt mutual funds?
There are eight types of debt funds. They include:
- Liquid Funds/Money Market Funds
Best for short-term investments, this scheme provides liquidity because your money is investedinto liquid debt securitiesor money market instruments. It is oftena low-risk fund as compared to the other types of funds because the returns fluctuate less. You canalso invest into it for justa day and exit without paying an exit loads.
- Short-Term Funds
These fundsoften invest in certificate of deposits and bonds or commercial papers, with an average maturity of 1 to 3 years. They are suitable for conservative investors with modest risk appetite who haveadequate money for investments from 9 to 12 months. These funds do well when the short-term interest rates are high.
- Ultra Short-Term Funds
Previously known as Liquid Plus Funds, Ultra Short-Term Debt Funds are an instrument where asignificant part of your amountgets invested into ultra-short-term debt securities,and some amount goes into long-term debt securities. In this case, most of theinvestment hasa residual maturity of less than a year.However, these are low risk and best for investors with a 1 to 12-month horizon.
- Dynamic Bond Funds
These funds involve investments across all classes of debt and money market instruments, which include a mix of corporate bonds, debentures and government securities with different maturity profiles. They are suitable for investors with a medium-high risk appetite, who are willing to leave the amount to the fund manager to actively manage their funds.
- Income Funds
Income debt mutual funds are largely exposed to changes in interest rates and are ideal for high-risk takers with a long-term investment plan. Such an investment should ideally be made when the market rates have peaked and are predicted to fall. Often investments aremade in money market instruments and corporate and government bondswhich have a longer maturity period.
- Gilt Funds
These invest in securities issued by central and state governments with medium and long-term maturity periods. The risk factor for interest rates is high depending on the maturity profile, though there is a zero default risk. This investment is ideal for those who have ahigh-risk appetite and are looking for capital appreciation.
- Debt Hybrid Funds
Also called Balanced Funds, Debt Hybrid Fundsoften invest in a mix of equity and debt securities with almost75% in debt and the balance 25% in equity. As an investor, if you have a view of three years or more and are fine about higher levels of risks than regular debt funds , you must consider investing in this type of fund. They are available in three categories, namely, monthly income plans (MIPs), asset allocation funds and capital protection-oriented funds.
- Fixed Maturity Plans
Commonly known as FMPs, these funds invest in debt instruments which have specific maturity dates that are equal to or lessthan the scheme’s maturity date.However, if you remain invested until the maturity period, a low-interest rate riskis involved. These aretax-efficient, close-ended, and are an excellent alternative to Fixed Deposits for those in the higher Income Taxslab.
- What are the benefits of Debt Funds?
- Debt funds are not affected by market risks. Thus, making it one of the best investment options.
- These funds provide better returns than bank services such as Savings Account or Fixed Deposits that offer 4% returns.
- In FDs, investors receive returns with applied taxes. However, in debt funds, investors have the benefit to withdraw the amount in advance, after which, the taxis levied.
- Most investors often invest in highly rated fixed income bonds that generate stability and secure returns.
- The transaction cost in debt mutual funds is less than mutual funds.
Don't miss another Article
Subscribe to our blog for free and get regular updates right into your inbox.