Debt Mutual Funds – Types And Benefits

INTRODUCTION: 

Arjun always wanted to study and know about different types of mutual funds so he knew whom to go to. His best friend talked about every fund in detail and the one that stuck with Arjun’s mind was debt mutual fund and what his best friend who is also a financial advisor said is mentioned here in this article. 

What are debt mutual funds?

Debt funds generally invest in fixed-income instruments including bonds, stocks, and Treasury bills. They engage in Fixed Maturity Plans (FMPs), Gilt Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds, and Monthly Income Plans, among other fixed-income instruments. Because the assets have a set rate of interest and expiration date, they might be a good choice for inactive investors who are looking for consistent revenue (interest and capital gain) with little risk.

Debt is one of the most popular places for people to invest their hard-earned money to benefit. The debt issue is made up of a variety of products that make it easier to purchase and sell debts in return for interest. Many traders with a lower tolerance for risk choose debt instruments because they are considered to be less dangerous than equity investments. Debt investments, on the other hand, provide lesser returns than equity investments. Here, we’ll look into Debt Funds and discuss the many sorts of debt funds, as well as their advantages and disadvantages.

What are Debt Funds and How Do They Work?

Every debt instrument has a credit score, which informs investors about the risk of the loan issuer failing to pay the principal and interests. These evaluations are used by debt fund managers to choose heavy debt instruments. A higher rating indicates a lower risk of default by the issuer.

Debt funds are categorized into the following categories based on their maturity period:

1. A liquid fund invests in money market products with a total maturity of 91 days.2.
2. These funds are ideal for investors looking for low-risk debt instruments that may be held for a short time.
3. The Dynamic Bond Fund invests in debt instruments with changing maturities according to the interest floating regime. These funds are ideal for investors with a moderate tolerance for risk and a 3- to the 5-year investment horizon.
4. Corporate Bond Fund — These investors invest at least 80% of their asset value in the highest-rated corporate bonds.
5. Banking and PSU Fund – This fund invests at least 80% of its asset value in debt securities issued by PSUs and banks.
6. Credit Risk Fund – A credit risk fund spends at least 65 percent of its available to invest the corpus in corporate debt with grades below the best grade corporate debt. As a result, these funds contain some default risk and provide somewhat higher yields than the highest-rated bonds.
7. Floater Fund – a fund that invests at least 65 percent of its available capital in floating interest tools. These funds have a minimal chance of interest rate rises.
8. Overnight Fund — deals in debt securities with a one-day maturity. Credit rating and interest rate increases are both low in these products, making them exceptionally safe.

The following are four important advantages of investing in debt mutual funds.

The following are four advantages of investing in debt funds.

1. Consistent Returns: Debt funds are more likely to provide a consistent rate of return independent of market conditions. As a result, if you have a poor tolerance for danger, they provide a safer alternative. Debt funds are also a good option if you need to plan for a specific financial goal within a specific timeframe.

2. Invest in an instability hedge: Debt funds can provide a good hedge against the capital market’s volatility. The amount of debt in your portfolio will be determined by your financial goals and deadlines, as well as your risk tolerance. Your investment returns will be more stable as a result of this diversification.

3. High cash flow: Debt funds are easy to expropriate, and that you can cash out your incentive to invest much faster than most other financial products, such as fixed deposits, which have required lock-in periods and impose penalties for early termination. So, if you think you’ll need additional cash in the event of a personal and medical emergency, or if you want to put money aside for a short period, consider borrowed money.

4. Lower Transaction Fees: When contrasted to equities and other mutual funds, debt funds offer lower transaction costs. Unlike FDs, which are similarly low-risk assets that most people choose, TDS is not charged on debt and other mutual fund schemes. If you sell fund units, however, you will owe taxes based on the term of your investment. When compared to fixed deposits or your savings account, they often provide superior returns.

CONCLUSION: 

It’s important to remember, though, that, unlike bank deposits, debt mutual funds aren’t completely risk-free. A rise in interest rates, for example, might influence your investment. Due to unforeseeable circumstances, the corporation in whose bond your fund may have invested might fail. Alternatively, they could be experiencing a cash crunch, putting your incentive to invest at risk. Debt returns are typically lower than stock returns over a lengthy period, so a debt fund is a good choice if you want to be safe and have a specific financial goal and timeline in mind. Alternatively, if you have excess cash in your bank account, you may be able to earn a higher rate of interest from loans.