What is Debt Mutual Fund?
Debt funds invest in securities that generate income. Examples of such securities are: corporate bonds, government securities, commercial paper, treasury bills etc. The dual objectives of investing in a debt fund are to achieve capital appreciation and also earn interest income. The interest rate that you will earn along with the maturity period are pre-decided by the issuer.
Types of debt funds
The portfolio manager keeps changing the composition of a dynamic debt fund according to changing interest rates and hence the name. Their average maturity period keeps fluctuating.
A gilt debt fund invests only in government securities. These are highly rated securities with extremely low credit risk. Usually, the government rarely defaults on the loan it avails of in the form of debt instruments. Therefore gilt funds are most suitable for risk averse investors.
A liquid debt fund only invests in debt instruments whose maturity is not beyond 91 days. Thus it is highly preferable for conservative investors. Liquid funds are better alternatives to savings accounts as the former offer similar liquidity with higher returns.
Debt funds that invest in securities whose maturity periods range between 1 and 3 years fall under this category. They are largely unaffected by interest rate movements and hence preferred by conservative investors.
Income funds may invest in debt securities with different maturities according to prevailing interest rates. However they mostly invest in securities which have higher maturity period. Therefore they end up being more stable than dynamic funds and could be termed as long term debt funds. The average maturity is around five to six years
Fixed maturity plans (FMP) are closed-ended debt funds which invest in fixed income securities like corporate bonds and government securities. All FMPs have a fixed horizon for which your money will be locked-in. This horizon can be in months or years. However, you can invest only during the initial offer period. It is like a fixed deposit that can deliver superior, tax-efficient returns but do not guarantee return
Benefits of investing in debt funds
Here are some of the benefits of investing in debt fund schemes:
How to invest in Debt Mutual Funds?
It is preferable to invest a lumpsum in debt mutual funds unless you are exploring gilt an income funds which are comparatively volatile.
