A debt fund is a type of mutual fund that focuses its mutual fund investment primarily on fixed-income securities and other debt instruments. This type of mutual fund is less volatile, unlike equity funds. Hence, they generate stable returns. Investing in debt funds can help yougenerate steady income over a period of time asthese funds try to fetch optimum returns by spreading your investments across all classes of securities.
How do debt funds work?
Debt mutual funds allocate funds to a wide range of financial securities based on their credit ratings. The fund manager of a debt mutual fund ensures that they invest in a high-rated credit instrument. A higher credit rating means that the AMC is reliable.The maturity of a debt fund depends on the fund manager’s investment strategy and the overall interest rate regime. Falling interest rate regimes encourage a fund manager to allocate funds to long-term securities, on the other hand, rising interest rate regimes encourage them to invest in short-term securities.
Why should youconsider debt funds for investment?
An ideal mutual fund portfolio should be a mixture of equities, gold, debt, and other instruments. Adding debt instruments makes a portfolio diverse and balanced. Below are a few advantages of a debt mutual fund:
- Low Risk:
If you are a conservative investor seeking capital appreciation with low risk should consider debt funds as an investment option. These funds are immune to market volatility because investments are made in fixed-income securities with fixed maturity periods and rates of interest. Adding them to the portfolio with equity instruments balances the risk-return profile. Debt funds serve as a hedge against market volatility when other funds underperform.
- Useful for short-term goals:
These funds sometime offer higher interest rates than bank accounts. Hence, debt funds can help in achieving short-term goals. You can also keep aside a portion of your income in debt funds for creating an emergency fund to deal with urgencies.
- Stable Returns
Debt funds generate stable returns because market sentiments have little or no impact on them. Debt funds allocate approximately 65% of the corpus to debt instruments that do not fluctuate easily.
These funds have the flexibility of two investment modes namely the lumpsum mode and the SIP mode. Opt for the lumpsum mode if you have the required investment amount at your disposal. Alternatively, you can start small by investing a certain sum through SIPs (systematic investment plans).
- Regular Income:
You can opt to enjoyincome in the form of dividends. Or you canalsoconsider opting for SWPs (systematic withdrawal plans). These plans help you to withdraw money by selling your units according to your needs.
- Suitable for freshers:
Debt funds are low-risk investments. Therefore, new investors can start with these funds before they can move on to market-linked equity funds. Fresh investors can enjoy steady returns without the fear of losses due to market volatility.
Debt funds can stabilise and diversify your mutual fund portfolio by generating steady returns. Theyare one of the best mutual funds for investors with a low-risk appetite. You can use them during emergencies as they are liquid.