Debt funds are an asset class whereby people invest in securities resulting in the generation of a fixed income like treasury bills, corporate bonds, commercial papers, government securities, and many such money market investments. The maturity date and the interest rate are pre-determined and the investor is aware of it before making the investment.
After maturation of the amount, an investor earns returns that are not affected by the volatility of the prices and markets. The fixed income or debt securities have a lower risk factor. Diversification of investment options in mutual funds has led to the success of debt funds. It caters to the varied need of the investor.
The debt securities are usually given a credit rating which equips the investor to understand the status of the disbursement of principal and interest by the issuer of the debt and such information helps the investor from being a defaulter. High-yielding debt investments are usually chosen by the fund managers for investment purposes.
A higher credit rating portrays the likeliness of the entity to make the payment of the interest. Moreover, the strategies of the fund managers are crucial regarding investment during the low-interest regime and high-interest regimes.
Debt funds do not guarantee returns but most of the time the return amount is quite predictable. People who willing to take a zilch risk with investment might invest in debt funds. Most short-term or long-term investors invest in debt funds. The liquidity of the investment is high as the investor can take out the investment whenever necessary.
Types of Debt Funds
- Short-term Funds: These are best for new investors who want to put in money and expect returns in a year or so. These have a maturation date that is much shorter compared to the rest of the debt funds. It is comparatively less of a risk for investment purposes.
- Ultra-short debt funds: These debt funds are meant for the shortest time for maturation which is less than a year. People who are new investors may want to invest in such a kind of debt fund where returns come quickly within a shorter period of time.
- Income Funds: Income funds usually invest in govt securities and corporate bonds taking into consideration the amount of interest. These have a variety of maturation periods but mostly they are long-term in nature like 5 to 7 years. People who are low-risk takers should invest in this type of debt fund.
- Dynamic Bond Fund: The maturation date varies according to the interest regime rate. These can be of long and short-term basis. These are ideal for medium risk-takers.
- Gilt Fund: Most of the percentage of investment goes into govt securities in this kind of fund. These have no credit risk and have varied maturation dates. People who do not like taking risks may invest in this kind f fund.
- Credit Risk Bonds: This sort of debt fund is created is when incurred when at least 65 % of the amount of investment is invested in corporate bonds.
Debt funds are one of the better investments if you want better returns than conventional investments such as fixed deposits and recurring deposits, but don’t want to subject your investments to greater risk and market volatility.
Therefore, take into account different considerations, including risk, dividends, fees, the maturity of the funds, and taxation, when selecting the best types of debt funds that are appropriate for you. It’ll make you invest wisely.