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There are various types of mutual funds available in the market, and these can be categorised based on their composition and investment style. If you want to invest in mutual funds, the following are your major options. You can invest in mutual funds online, once you choose your pick from these different types of mutual funds

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What Are Debt Mutual Funds?

Debt mutual funds invest in fixed-income securities such as government bonds, corporate bonds, treasury bills, and other money market instruments. These funds are designed to provide regular income, capital preservation, and relatively lower risk compared to equity funds.

Types of Debt Mutual Funds

Debt mutual funds come in various types, catering to different investment horizons and risk profiles:

Overnight Funds: Invest in securities with a maturity of one day, offering minimal risk.
Liquid Funds: Invest in securities with a maturity of up to 91 days, ideal for short-term parking of surplus funds.
Short Duration Funds: Invest in securities with maturities of 1-3 years, balancing returns and risk.
Medium Duration Funds: Hold securities with a 3-4 year maturity, offering moderate interest rate risk.
Long Duration Funds: Invest in securities maturing beyond 7 years, suitable for investors with a long-term horizon.
Credit Risk Funds: Invest at least 65% in lower-rated corporate bonds, offering higher yields with increased credit risk.
Dynamic Bond Funds: Actively manage duration based on interest rate changes.
Fixed Maturity Plans (FMPs): Closed-end funds with a fixed maturity date, providing predictable returns.

Why Should You Invest in Debt Funds?

Investing in debt mutual funds offers several advantages:

Capital Preservation: Lower volatility compared to equity funds, making them suitable for conservative investors.
Liquidity: Easier access to money compared to fixed deposits.
Diversification: Spread risk across different issuers and instruments.
Steady Income Generation: Regular interest payments provide stability.
Market Volatility Protection: Less affected by stock market fluctuations, making them a reliable investment during uncertain times.

Who Should Invest in Debt Mutual Funds?

Debt mutual funds are ideal for:

Conservative Investors: Looking for stable returns with minimal risk.
Retirees: Seeking steady income without significant risk exposure.
Short to Medium-Term Investors: Saving for financial goals like education, vacations, or car purchases.
Diversification Seekers: Balancing equity market volatility with fixed-income investments.
New Investors: A safe entry point into investing without complex stock market exposure.

How Do Debt Funds Work?

Debt mutual funds pool money from investors and allocate it to fixed-income securities. The returns come from:

Interest Income: Regular payments from bonds held in the fund.
Capital Gains: If the fund sells securities at a higher price.
Marked to Market Growth: Daily fluctuations based on market value and interest rate movements.

What are the Risks in Debt Funds?

While debt funds are considered safer than equities, they still carry risks:

Interest Rate Risk: Bond prices fall when interest rates rise.
Credit Risk: Issuers may default on payments.
Liquidity Risk: Difficulty in selling lower-rated securities during market stress.
Reinvestment Risk: Lower returns when reinvesting in a falling interest rate environment.
Market Risk: Economic factors can affect bond yields and prices.

Taxation on Debt Mutual Funds

Since April 2023, debt mutual funds are taxed as per individual income tax slab rates, regardless of the holding period. Previously, long-term investments (over three years) benefited from indexation, reducing taxable gains.

How to Invest in Debt Funds Online

Investing in debt mutual funds online is simple:

Choose a Reliable Platform: Select a mutual fund house or distributor.
Complete KYC: Use PAN and Aadhaar for verification.
Select a Fund: Based on investment goals and risk appetite.
Invest via Lump Sum or SIP: Opt for a one-time investment or a Systematic Investment Plan (SIP).
Monitor and Redeem: Track performance and redeem based on needs.

Choosing the Best Debt Fund

The best debt fund depends on:

Investment Horizon: Short-term vs. long-term goals.
Risk Tolerance: Higher-rated bonds offer lower risk but lower returns.
Fund Performance: Evaluate past returns and fund management efficiency.

Edelweiss Mutual Fund Debt Offerings

Edelweiss Mutual Fund provides a variety of debt funds across active and passive categories:

Active Debt Funds: Edelweiss Overnight Fund, Edelweiss Liquid Fund, Edelweiss Money Market Fund, Edelweiss Government Securities Fund, Edelweiss Low Duration Fund.
Passive Debt Funds: Bharat Bond Funds (ETF & Fund of Fund structure), which invest only in AAA-rated public sector bonds of specific maturity.

What Are Debt Mutual Funds?

Types of Debt Mutual Funds

Debt mutual funds come in various types, catering to different investment horizons and risk profiles:

Overnight Funds: Invest in securities with a maturity of one day, offering minimal risk.
Liquid Funds: Invest in securities with a maturity of up to 91 days, ideal for short-term parking of surplus funds.
Short Duration Funds: Invest in securities with maturities of 1-3 years, balancing returns and risk.
Medium Duration Funds: Hold securities with a 3-4 year maturity, offering moderate interest rate risk.
Long Duration Funds: Invest in securities maturing beyond 7 years, suitable for......

Edelweiss Mutual Fund offers you with wide variety of debt mutual funds in both the active and passive investing space. Some of the active debt funds are Edelweiss Overnight Fund, Edelweiss Liquid Fund, Edelweiss Money Market Fund and Government Securities Fund. Some of the most popular debt funds in the passive space are the Bharat Bond Funds which are offered both in the ETF and Fund of Fund structure. BHARAT Bond Funds invests only in AAA rated public sector bonds. You can start investing with as low as 1000 rs in these funds.

Debt mutual funds invest in the fixed income securities. These securities usually have a fixed interest rate and a fixed maturity period that is selected by the issuing entity. But there is no lock in. The risk factor associated with the debt mutual funds depends on the credit rating of the underlying securities it invests in. Higher the rating lower is the risk. Debt funds are also subjected to interest rate changes. The bond price is inversely related to the interest rate. So, when the interest rate increases, the bond prices come down and vice versa. Know more about passive investing

You can check the latest performance of Edelweiss Debt funds here

Debt mutual funds are relatively safer investment option than equity mutual funds as they are not exposed to equity market volatility. They are highly liquid, and you can redeem and get the amount in your bank account within 24 hours also for some of the funds like liquid funds which can be a good saving option for emergency funds. They also offer better returns than traditional saving investment options. They are also more tax efficient than traditional saving instruments due to the indexation benefit. Read more about indexation

Debt mutual funds offer you comparatively lesser returns as compared to equity mutual fund. Though debt mutual funds are considered safe and stable investment option as they avoid market risk but they are not completely risk free. Sometimes institutions in which debt mutual fund invests in may default in paying the interest rate which is called as credit rate risk. Hence it is important to check these details before investing in debt mutual funds. There are too many debt mutual funds available in market hence it can be confusing for you to select the right fund, in that case you should seek guidance from your Financial Advisor or Mutual Fund Distributor. You can also consider investing in target maturity funds which are a kind of Debt Passive Funds. These funds have a fixed maturity date and you also have visibility of returns. These funds are comparable to a traditional deposit.

There is no benefit in life which comes for free. Investing in debt mutual fund comes with following risk Credit Risk- Debt mutual funds invest in fixed income securities with good credit rating. But there may be situations where institutions which debt mutual fund invest in may default to pay interest rate risk. This is called as a credit risk and in such a scenario, such debt mutual fund may not pay you returns as promised. Hence it is important to check before investing in debt mutual fund. Interest rate risk- When the interest rate increases, the price of bond decreases and this in turn decreases the overall value of the bond in which the debt fund has invested. This is called as interest rate risk.