Debt Mutual Funds - How to Invest and Who Should Invest

What are Debt Mutual Funds?

Debt mutual fund is mutual funds that invest in fixed-income securities such as commercial paper (CP), certificates of deposit (CD), corporate bonds, short-term government securities, government securities, and other money market instruments. These instruments have a fixed maturity date and a fixed interest rate that the buyer earns until the security matures. Considered to be less volatile than equity funds, they are ideal for investors who are relatively risk-averse and seek investment stability. In this article, we will learn about debt mutual funds, debt funds, and who should invest in debt mutual funds.

What are Debt funds?

Debt funds invest in securities that produce fixed-income securities such as treasury bills, corporate bonds, commercial paper, government bonds, and many other money market instruments. Money market instruments include commercial paper (CP), certificates of deposit (CD), and Treasury bills (T-Bills). Debt market instruments include non-convertible bonds (NCDs), government bonds, or G-Secs. Purpose of investment Bonds or money market instruments receives income in the form of interest payments. Although the primary investment objective of debt funds is income, some interest-accepting debt funds provide capital appreciation to investors. The main difference between debt and equity funds is that debt funds are significantly less risky than equity funds.

Who should invest in Debt Mutual Funds?

Debt funds are highly recommended for investors with a low-risk appetite. Debt funds are typically spread across a variety of securities to ensure consistent returns. There are no guarantees, but returns are generally within the expected range. Therefore, low-risk investors consider them ideal. Debt Funds are also available:

Short Term - Instead of keeping your money in a regular savings account, you can invest in cash that offers 7-9% returns. We also do not compromise on liquidity. 

Long Term - When investing in low-risk products for 3-5 years, bank deposits are probably the first thing that comes to mind. Investments in similar maturity dynamic bond funds tend to offer higher returns than FDs. You can also choose a monthly income plan if you need monthly payments (such as interest on FD).

Types of Debt Funds

Here are the types of debt funds, based on maturity period:-

• Overnight Fund: This fund invests in securities with a maturity of one day. Due to their short duration, overnight funds are considered relatively stable as they carry minimal credit and interest rate risk.
• Liquid Fund: The Liquid Fund invests only in bonds and money market securities that mature within 91 days. The underlying products are fairly liquid and may offer more reasonable returns than traditional instruments. Some liquid assets also have the option of immediate redemption functionality, allowing him to redeem up to ₹50,000 per day per scheme per investor.  
• Ultra-Short Duration Fund: The Ultra-Short Duration Fund invests in fixed income and money market instruments such that the portfolio has a Macaulay duration of three to six months.

• Low Duration Fund: The Low Duration Fund invests in fixed income and money market instruments such that the portfolio has a Macaulay duration of 6 to 12 months.
• Money Market Fund: The Money Market Fund invests in money market instruments with a maximum maturity one year he. This fund is an excellent alternative for storing surplus funds in the short term. It can also be used as an emergency fund as it is relatively liquid and has the potential to generate higher returns than traditional means.
• Short Duration Fund: The Short Duration Fund invests in fixed income and money market instruments such that the Macaulay duration of the portfolio ranges from one to three years.
• Medium Duration Fund: The Medium Duration Fund invests in fixed income and money market instruments such that the Macaulay duration of the portfolio is three to four years. 
• Corporate Bond Fund: The Corporate Bond Fund invests primarily in corporate bonds rated AA+ or higher. This option is suitable for investors who want to invest in securities with moderate risk tolerance and relatively low credit risk.
• Credit Risk Fund: This fund invests primarily in AA and below securities (excluding AA+ corporate bonds). Credit risk funds seek to generate higher returns by investing in securities that offer relativelhigh-interestst rates. However, there is a credit risk compared to other loan funds.
• Dynamic Bond Fund: The Dynamic Bond Fund invests in bonds of various maturities based on current interest rates. Fund managers dynamically change their portfolios according to interest rates. These funds are suitable for investors with moderate risk tolerance and looking for regular income in the medium term.
• Gilt Funds: Gilt Fund invests at least 80% of its assets in government bonds of various maturities. Given their exposure to government securities, they have considered relatively stable investments as they carry little credit risk.

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