Debt Funds Service By RightMF.com

Debt funds are great for new investors, It immune from market volatility, high liquidity, stabilizes investor portfolio with flexibility & tax efficiency

What is Debt Funds?

Debt funds are a type of mutual fund that invests in securities of fixed income such as bonds and treasury bills. These funds could include several short term, mid-term, and long term bonds. Debt funds are preferred by individuals who are not willing to invest in a highly volatile equity market. A debt fund provides a steady but low income relative to equity. It is comparatively less volatile.

How do Debt Funds work?

Debt fund managers make use of the credit ratings of various debt securities to determine and select the high-quality ones.

Every debt security comes with a credit rating through which investors understand the default possibility by the debt issuer in disbursing the principal invested along with the interest. A debt security with a higher rating means that there is less probability of it defaulting.

However, debt funds also invest in low-quality debt securities. Fund managers choose securities based on several other factors too. Sometimes, they choose low-quality debt securities because those might earn higher returns later.

There is no reason to worry because the best fund manager always makes a calculated risk. But debt funds that have high-quality securities in their portfolio are more stable. Also, a fund manager could invest in long-term or short-term debt securities based on whether the interest rates are falling or rising.

Equity Funds

Fund that primarily invests in stocks

Hybrid Funds

Invests in different asset classes for a diversified portfolio

Liquid Funds

One of the safest funds that provide a reasonable rate of return

Gilt Funds

Debt fund that invest in government securities

Types of Debt Funds

Debt Funds can be classified into the following types based on their maturity period:

1. Liquid Fund

Liquid Fund is a type of fund that invests in money market instruments that have a maturity period of 91 days. Liquid funds, generally offer better returns when compared to bank Savings Account. So, these are a good alternative if you want to stay invested in the short term.

2. Money Market Fund

Money Market Funds invest in money market instruments that have a maximum maturity period of 1 year. These are good for those investors who wish to stay invested for the short term and have a low-risk tolerance.

3. Dynamic Bond Fund

These invest in debt securities with varying maturity periods as per the interest rate regime. These are good for investors having moderate risk tolerance and for those who want to stay invested for about 3 to 5 years.

4. Corporate Bond Fund

Corporate Bond Funds invest a minimum of 80% of their total assets in corporate bonds that have the highest ratings. These are ideal for investors whose risk tolerance is low but they wish to invest in comparatively high-quality corporate bonds.

5. Banking and PSU Fund

Banking and PSU Funds, like the name suggests, invest at least 80% of their portfolios in debt securities of PSUs (Public Sector Undertakings) and banking institutions.

6. Gilt Fund

These invest at least 65% of their portfolios in corporate bonds with ratings below those of the highest quality corporate bonds. So, these funds do have some credit risk associated but they offer better returns when compared to the highest quality bonds.

7. Credit Risk Fund

Credit Risk Funds invest a minimum of 65% of its portfolio in corporate bonds that have their ratings below the highest-rated corporate bonds. So, these funds do have credit risk associated with them but offer slightly better returns when compared to the highest quality bonds.

8. Floater Fund

These invest a minimum of 65% of its investible corpus in floating-rate investments. Floater funds have a low interest-rate risk associated.

9. Overnight Fund

As the name suggests, Overnight Funds invest in debt securities with a maturity period of 1 day. Such funds are very safe to invest in as both credit risk and interest rate risk associated with them is minimal to negligible.

10. Ultra-Short Duration Fund

This fund invests in money market instruments and debt securities in such a manner that the Macaulay duration of the fund is from 3 to 6 months.

11. Low Duration Fund

Low duration debt funds type of fund invests in money market instruments and debt securities in such a manner that the Macaulay duration of the fund is from 6 to 12 months.

12. Short Duration Fund

Short-term debt mutual funds invest in debt securities and other money market instruments in such a manner that the Macaulay duration of this fund is from 1 to 3 years.

13. Medium Duration Fund

Medium duration funds invest in debt securities and other money market instruments in such a way that their Macaulay duration ranges from 3 to 4 years.

14. Medium to Long Duration Fund

This type of fund invests in money market instruments and debt securities in such a manner that the Macaulay duration of this fund is from 4 to 7 years.

15. Long Duration Fund

The long term debt funds invest in money market instruments and debt securities in such a manner that the Macaulay duration is more than 7 years.

Who should invest in debt funds?

Debt funds are ideal for investors with low-risk tolerance. Debt funds usually diversify their portfolios across several securities to make sure that you get stable returns. But, there is no guarantee whatsoever.

Usually, the returns received fall in the range of expectations. So, debt mutual funds are suited for low-risk investors.

Why should you buy Debt Funds?

The following reasons will tell you why you should invest in debt funds:

1. Regular Income Source

Debt funds are an ideal investment option if you want a regular income source. You should choose the dividend payout option if you want your investment to provide you with a regular income source.

2. Anytime withdrawal

Investors can withdraw the required money from your investment at any time as per your requirement and the rest of the money can stay invested.

3. Stability

Debt Funds invest largely in Government securities, corporate debts, and other securities such as treasury bills, etc. Such funds are immune to equity market volatility.

4. For achieving short term goals

This is a good option for achieving short-term goals as well. You could try investing in debt funds like ultra-short-term funds, liquid funds, etc. for your short-term financial goals.

5. SWP

Systemic Withdrawal Plan (SWP) is the exact opposite of SIP Plans. Through SWP, you will be able to withdraw a fixed income every month from your debt fund investment. You can alter the SWP amount as and when required.