Debt Funds

The debt fund, is primarily for those set of investors who want steady returns but do not want the risk involved in equity investments. Debt mutual funds invest in fixed income instruments that include government securities, commercial paper, treasury bills, corporate bonds, money market instruments and other debt of varying maturities.

Following are the benefits of Debt funds

  • Low risk
  • High liquidity
  • Ideal for parking short-term funds
  • Diversification of your portfolio 
  • Tax benefit
  • Investing small amounts
     

What is a Debt Fund?
In Debt funds, the fund manager invests money in securities that generate fixed income like treasury bills, corporate bonds, commercial papers, government securities, and similar other money market instruments. These instruments have a pre-decided maturity date and interest rate that the buyer earns on maturity – and so it’s named fixed-income securities. The returns of these investments are usually not affected by fluctuations in the market. That is also why debt securities are considered to be low-risk investment options. 

How do Debt Funds work?
Fund Managers of Debt Funds do their research to shortlist the debt security basis credit rating which allows investors to understand the possibility of default by the debt issuer in disbursing the principal and interest. Debt fund managers use these ratings to select high-quality debt instruments that can give stable returns over a period of time. A higher rating indicates that the issuer is less disposed to default.

Fund Managers select securities based on various factors. Sometimes, they choose low-quality debt security as it offers an opportunity to earn higher returns on debt investments and that is where the fund manager takes a calculated risk. However, a debt fund comprising of high-quality securities in its portfolio tends to be more stable. Further, the fund manager can choose to invest in long-term or short-term debt securities depending on whether the interest rate regime is falling or rising.