Mutual funds are open ended schemes that invest in various asset classes and money market instruments to generate returns over the long term. They can be largely classified as equity and debt. While equity funds predominantly invest in the stock market to generate returns, debt funds invest in fixed income securities and money market instruments.
Today we are going to discuss the basics of debt mutual funds.
What is a debt mutual fund?
Whenever government entities or corporate organizations are in need of surplus capital and want to raise funds, they issue debt bonds in exchange for the sum they are about to borrow. Also, they promise to return the money with fixed interest on a predetermined date. Debt fund managers invest in such bonds.
A debt mutual fund is an open ended scheme that invests in fixed income securities and money market instruments like treasury bills, corporate and government bonds, debentures, CBLO, commercial papers, etc.
Who should consider investing in debt funds?
Investors who do not wish to expose their finances to the dangers of equity markets may consider building their investment portfolio with debt funds. Equity mutual funds seeking diversification and liquidity can also consider debt funds. Individuals who wish to build an emergency fund so that they can smoothly glide over life’s unforeseen exigences can also consider investing in debt funds. Those who are currently unhappy with the interest their conventional investments are offering can also consider switching to debt funds.
What are the different types of debt funds?
As of now, there are 16 different product categories under the debt fund gamut –
- Overnight Fund
- Liquid Fund
- Short Duration Fund
- Medium Duration Fund
- Ultra Short Duration Fund
- Low Duration Fund
- Money Market Fund
- Medium to Long Duration Fund
- Dynamic Bond Fund
- Corporate Duration Fund
- Gilt Fund
- Credit Risk Fund
- Floater Fund
- Banking and PSU Fund
- Gilt Fund with 10 year constant duration
- Dynamic Bond Fund
Features of a debt fund
Depending on the nature of the scheme and its investment objective, a debt fund may either invest in high rated debt securities or low rated debt securities. Debt securities have credit ratings that are given to them based on their ability to repay their debts on the said time and date. Debt funds that invest in high credit rated securities may not be able to generate returns like those that invest in low credit rated securities. However, debt funds that invest in AAA+ securities are known to be less volatile than those debt funds that don’t.
Debt funds have portfolios of varying maturity durations. For example, a debt fund with a low maturity duration is ideal for building an emergency as its portfolio may mature anywhere between 12 months to 3 years. On the other hand, debt funds with a longer maturity portfolio can be considered for medium term financial goals.
Debt funds may not offer returns as high as equity schemes, they offer stability. The main investment objective of most debt funds is to offer stable returns and safeguard the investor’s capital.
How to invest in debt funds?
Debt fund investors can either make a one-time lumpsum investment or opt for the Systematic Investment Plan. SIP is a simple yet effective way to build a corpus with debt funds. If you have surplus capital that is sitting idle, you can even consider a lumpsum investment. However, through SIP investors can invest an amount as low as Rs 500 every month in debt funds.