Debt Fund

16 Jun, 2017, 11:03AM UTC by Jaydip Mehta

Debt Mutual Funds are Funds that invests in a mix of debt or fixed income securities such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons. Debt Securities gives a fixed rate of interest & have a fixed maturity date.Depending on the Mutual Fund, return (Comprise of Interest & Capital Appreciation/Depreciation) of a Debt Mutual Fund varies around 6% to 10%.

To check the ability of the issuer of the securities (to pay back their debt over a certain period of time) Debt Securities are assigned a Credit Rating. Various Independent Organizations like CARE, CRISIL, FITCH, Brickwork and ICRA issues these ratings. To check the credit worthiness of issuers of fixed income securities various criteria are used & this Credit Rating is among one of them.

Investors invest in Debt Mutual Funds based on their ability to bear risk & their investment horizon.

Different Types Of Debt Funds

Liquid Funds / Money Market Funds

  • Invests in Highly Liquid Money Market Instruments.
  • Provides easy Liquidity.
  • The period of investment could be as short as a day.
  • Less Fluctuation in result compared to other funds.

Ultra Short Term Funds

  • Invests in Short Term Debt Securities.
  • Also referred to as Cash or Treasury Management Funds.
  • Useful for investors willing to marginally increase their risk with an aim to earn commensurate returns.

Floating Rate Funds

  • Invests in Floating Rate Debt Securities.
  • Periodic Interest Rates of these products is being reset with reference to a Market Benchmark.
  • Generally, Investors invest in these funds when the market rates are increasing.

Short Term & Medium Term Income Funds

  • Invests in Debt Securities.
  • Have Maturity longer than Liquid and Ultra Short Term Funds but shorter than Pure Income Funds.
  • Generally, Investors invest in these funds when short term interest rates are high.
  • Useful for investors having ability to take low to moderate risk & having Investment Horizon of 9 to 12 Months.

Income Funds, Gilt Funds and other dynamically managed debt funds

  • Invests in a basket of debt instruments of various maturities & issuers.
  • Useful for investors having ability to take high risk & having longer Investment Horizon..
  • A few types of dynamically managed debt funds are mentioned below –
    • Income Funds
    • Invest in corporate bonds, government bonds and money market instruments.
    • Highly vulnerable to the changes in interest rates.
    • Suitable for investors having a long term investment horizon and higher risk taking ability.
  • Gilt Funds
    • Invest in government securities of medium and long term maturities issued by central and state governments.
    • Do not have the risk of default since the issuer of the instruments is the government.
    • Net Asset Values (NAVs) of the schemes fluctuate due to change in interest rates and other economic factors.
  • Dynamic Bond Funds
    • Invest in debt securities of different maturity profiles.
    • These funds are actively managed and the portfolio varies dynamically according to the interest rate view of the fund managers.
    • These funds Invest across all classes of debt and money market instruments with no cap or floor on maturity, duration or instrument type concentration.

Corporate Bond Funds

  • Invests in Corporate Bonds & Debentures.
  • Highly Volatile & have High Credit Risk.
  • Suitable for investors having capacity to bear low risk & having Long Investment Horizon.

Benefits of investing in Debt Mutual Funds
The various benefits of investing in Debt Mutual Funds are listed below –

Your investments are not affected by equity market volatility
Debt Mutual Funds invest in a range of interest bearing instruments such as Treasury Bills, Government Securities, Corporate Bonds, Money Market Instruments and other debt securities.

Add stability to your investment portfolio
As Debt Mutual Funds mainly invest in debt securities, they are relatively more stable than equity investments. They can also lend stability to your equity portfolio by reducing the risk associated with your complete investment portfolio.

Freedom to withdraw your money when required
All open ended mutual funds give you the freedom to withdraw your money as and when required, although your investments may be subject to an exit load. Close ended mutual funds have a defined maturity date. Such funds are listed and can be traded on the stock exchange.

Indexation Benefit
Indexation adjust the purchase value of your investment to indicate the impact of inflation, while calculating long term capital gains tax for investments held for over 1 year.

Contact us now to invest in debt funds.

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