Debt Mutual Funds are mutual fund schemes that promise you decent returns, capital protection and regular interest income. If you are a conservative investor and are looking forward to investing in an avenue that helps secure your money and earn decent, regular returns, then debt funds are an excellent option for you. Debt-oriented mutual funds invest anywhere between 75 per cent 85 per cent into debt. They are suited for those who are looking forward to playing safe with their regular income with decent capital protection, but at the same time looking for good growth to counter inflation in the long run.
Also, this kind of investment is good, particularly for investors in the retirement phase of the life cycle, since they can be assured of a fairly safe source of income.
What are debt funds?
Debt Mutual Funds usually invest in government securities, bonds and other such securities. You can be assured regarding the safety of your money because such funds only invest in highly rated securities, i.e. ones that have a negligible risk of default. These ratings are provided by agencies such as CRISIL, ICRA and are extremely reliable.
Even though debt funds are usually considered very safe, they are not without their fair share of risks. Debt securities carry both, interest rate risk and credit risk. While, the interest rate risk involves the risk of your securities being vulnerable to volatile interest rates, especially during the end of their maturity period; credit risks refer to the risk of defaulting of payments by the one who issues the underlying securities of the fund. This may include the government or any other entity.
Why choose Debt Funds?
Debt Funds are ideal for both, long-term and short-term perspectives. If you are looking for a short horizon of between 3 months to 1 year, you may opt for liquid funds. Conversely, short-term bond funds can also be considered for a tenure of up to 2 to 3 years. In the case of an intermediate horizon of between 3 to 5 years, dynamic bond funds would be ideal.
Some major categories of Debt Funds include:
1) Credit Opportunities Fund
2) Ultra-Short term and Short-term debt funds
3) Dynamic Bond Funds
4) Gilt-edged Funds
5) Income Funds
6) Floating Rate Funds
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