What Are Debt Funds?

Have you finally decided to invest in mutual funds? Are you ready to start the investment? If you are feeling confused about which mutual fund type to choose, know that a debt fund would be a good choice to go with. 

What Is A Debt Fund? 

A debt fund invests in fixed income instruments. It is a mutual fund type. Corporate & government bonds, government securities, corporate debt securities, commercial paper, and other money market instruments offering capital appreciation are to name a few. Debt funds are also referred to as bond funds or fixed income funds. One of the key reasons people like to invest in debt funds is that it helps people attain a steady income as well as capital appreciation. As far as the prime advantages of debt funds are concerned, low-cost structure, relatively high liquidity, relatively stable returns, and reasonable safety are the key ones. 

How Do Debt Funds Work?

Every debt security comes with a credit rating. This credit rating allows investors to comprehend the possibility of default by the debt issuer in disbursing the principal and interest. It must be noted that debt fund managers use these ratings to choose high-quality debt instruments. A higher rating is the indication of the issuer is less likely to default.

As far as debt funds investing in low-quality debt instruments is concerned, it must be kept in mind that fund managers keep multiple factors in mind while choosing the securities. Many times, choosing low-quality debt security helps one gain higher returns on debt investments. Moreover, the fund manager takes a calculated risk. Nonetheless, a debt fund that has high-quality securities in its portfolio will be more stable. Note that the fund manager can invest in long-term or short-term debt securities based on whether the interest rate regime is rising or falling. 

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Who Should Buy Debt Funds?

A debt fund is a perfect choice for investors who want a regular income but are risk-averse. Debt funds are less volatile, thereby being a lesser risk than equity funds. If you have been saving in traditional fixed income products such as Bank Deposits and wish to receive steady returns with low volatility now, debt mutual funds could be a better option. Why and how? It is because a debt mutual fund will help you achieve your financial goals in a more tax-efficient manner, thereby helping you earn better returns.

So, whether you are a short-term investor (3 to 12 months) or a medium-term investor (3 to 5 years), investing in a debt mutual fund could help you in more ways than one. 

Final Words

Debt mutual funds are a superior choice to go with if you want an investment that’s worth your time, effort and money. However, it is advised to consider all possible options before making any investment decision.

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Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.