Debt funds are mutual funds wherein the underlying assets are fixed-income securities. Fixed income securities could range from bonds, treasury bills, Government Securities to different market instruments.
Investing during a certificate of indebtedness is analogous to lending an advance to the issuing entity. Debt mutual funds aim to supply interest income periodically along side scope for capital appreciation. Such funds invest in fixed-income generating securities and are preferred by individuals, who don’t wish to take a position in volatile equity markets. The issuer pays a hard and fast coupon which is understood beforehand along side tenor which helps a fund manager of the scheme also as investor to possess a reasonably decent idea about the likely returns on the cash he’s getting to invest.
How do Debt funds work?
Debt Funds are a category of mutual funds which are professionally managed by a fund manager. The role of the fund manager is to take a position in securities that meet the investment objective of the fund. this is often achieved by investing consistent with the credit rating of the instruments and nature of the fund. The credit rating of the issuer helps to work out whether the firm would be ready to service interest obligations regularly.
The fund manager typically chooses to take a position in high credit quality rated g instruments. a better credit rating means the issuer are going to be consistent in disbursing interest payments periodically, also as pay back the principal amount on maturity. By investing in high credit quality instruments, debt funds endeavour to supply safety of principal.
The fund manager also determines the maturity period of instruments held in each portfolio counting on the outlook of the interest rates within the economy. If the interest rates are predicted to fall, the fund manager invests in long-term securities. Instead, if the interest rates are predicted to rise, investments are made in short-term securities.
Different Types of Debt Funds:
Overnight Funds
Overnight funds invest in securities with an investment horizon of 1 day. Given the short duration, interest fluctuations are minimal. These funds are often considered safe investments.
Liquid Funds
Liquid funds invest briefly term market securities which maturities of but 91 days. If you would like to park your funds for a brief period bearing little risk then, liquid funds are an honest investment option. They typically offer higher returns than regular savings deposits also .
Ultra Short-Duration Funds
These debt funds invest in debt and market instruments which mature between 3 to six months. they provide higher returns than a hard and fast deposit. Such funds carry a comparatively lower rate of interest risk.
Short Duration Funds
Short Duration Funds invest in debt and market instruments that mature between 1-3years. they’re relatively low on risk. Ideal for conservative investors as they typically not subject to high-interest rate fluctuations.
Corporate Bond Fund
Funds that invest a minimum of 80% of their corpus in highest-rated corporate bonds are categorised as bond Fund. they provide scope to earn higher returns than those provided by short term debt funds. Though you would like to observe out for credit risk related to downgraded ratings.
Credit Risk Fund
Credit Opportunities fund may be a relatively new category that typically invests 65% of its assets into debt instruments rated below highest credit quality. These funds take a call regarding proportion to take a position in high interest yielding low-rated bonds, unlike other debt funds that are focused on determining the tenure, or, the typical maturity. Hence, they’ll be riskier than other debt funds.
Gilt Funds
Funds that invest a minimum of 80% of their corpus in government securities (G Secs) across maturities are called Gilt Funds. The portion invested in Government securities virtually carries no credit risk.
Fixed Maturity Plans (FMPs)
Fixed Maturity Plans can only be invested within the initial offer period. they’re close-ended debt funds. they’re locked certain a hard and fast tenure, which could vary from months to years. FMPs tend to supply superior and tax-efficient returns if held for quite three years. However, there’s guarantee of consistent returns.
Long Duration Funds
Long Duration Funds are debt mutual funds that are managed actively to get steady returns over different market scenarios. They mostly invest in future securities comprising G Secs, Bonds and Debentures. The duration of the fund is longer than seven years.
Dynamic Bond Funds
These funds invest in debt instruments across different issuers and have dynamic maturity periods. they’re fitted to investors with a moderate appetite for risk and are watching an investment horizon of between 3-5 years.
