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Debt Funds Meaning

What Are Debt Funds? How To Invest In Debt Funds?

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If you are looking for the two 'S' - stability, and a systematic approach for your mutual fund portfolio, you can consider a debt fund investment. Debt mutual funds invest in fixed-income securities with a fixed maturity period and interest rate, such as commercial papers, corporate bonds, certificates of deposit, treasury bills, and more.

These funds are relatively low-risk investments and are suitable for risk-averse investors. If you wish to invest in them, this article can be helpful.

Understanding debt mutual funds and their types

Debt mutual funds invest in fixed-income securities where the issuer fixes an interest rate and maturity period. These securities pay out the agreed amount at maturity. Debt funds invest in securities with credit ratings, which help you assess the issuer's ability to repay the principal and interest without defaulting.

While debt funds carry risks such as default risk (the risk of the issuer failing to pay) and interest rate risk (the risk of fluctuations in interest rates), they generally carry lower risk compared to equity funds.

As classified by the Securities and Exchange Board of India (SEBI), there are 16 types of debt funds:

  1. Overnight fund
  2. Liquid fund
  3. Ultra-short duration fund
  4. Low duration fund
  5. Money market fund
  6. Short duration fund
  7. Medium duration fund
  8. Medium to long-duration fund
  9. Long duration fund
  10. Dynamic bond fund
  11. Corporate bond fund
  12. Credit risk fund
  13. Banking and PSU fund
  14. Gilt fund
  15. Gilt fund with a ten-year constant duration
  16. Floater fund

Why should you invest in debt funds?

Debt fund investments can offer the following benefits:

 

  • Low-risk: Debt funds are considered low-risk investments because they primarily invest in fixed-income securities such as government bonds, corporate bonds, and other debt instruments. They can be suitable if you are a conservative investor.
  • Liquidity: Debt funds are highly liquid due to their shorter maturity periods. They are ideal for short-term goals or for parking idle funds. Their liquidity allows you to have easy access to your funds in case of emergencies, making them suitable for storing emergency funds.
  • Diversification: Debt funds help diversify your investment portfolio. They bring stability as they are less affected by stock market fluctuations. Adding debt funds to your portfolio can reduce overall portfolio risk and enhance stability.


How do you invest in debt funds?

Here are the steps to investing in a debt mutual fund:

  1. Understand your goals and select a suitable debt mutual fund

Before investing, it is essential to assess your financial goals and investment horizon carefully. Each type of debt fund serves different purposes, and you must select a fund that aligns with your needs.

  1. Look up the Asset Management Company (AMC) and fund manager

Researching the AMC's reputation, track record, performance history, and reliability are essential. Similarly, you can assess the experience and track record of the fund manager overseeing the debt mutual fund you are interested in.

  1. Select between a lump sum or Systematic Investment Plan (SIP)

Decide whether you want to invest a lump sum amount upfront or opt for an SIP where you invest regular amounts at fixed intervals. It is important to select a method that aligns with your income and budget.

Important factors to keep in mind when considering debt mutual funds

While debt funds generally carry lower risk compared to equity funds, they are not risk-free. Understanding the risks associated with debt funds, such as interest rate risk, credit risk, and liquidity risk, is crucial. Assessing the credit ratings of the securities held by the fund can help you select stable options.

Conclusion

Debt mutual funds offer several advantages, including liquidity, diversification, and professional management. These mutual funds are particularly suitable for short-term goals due to their lower risk profile compared to long-term options like equity. While debt mutual funds returns may be relatively lower, they can still serve as valuable additions to any investment portfolio.

 

An investor education initiative by Edelweiss Mutual Fund

 

All Mutual Fund Investors have to go through a one-time KYC process. Investors should deal only with Registered Mutual Fund (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit - https://www.edelweissmf.com/kyc-norms  

 

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME-RELATED DOCUMENTS CAREFULLY

 

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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.