5 Questions About Debt Funds

A debt fund is a category of mutual funds that particularly invests in debt (fixed income) instruments like corporate bonds, debentures, government securities, commercial papers, etc. These funds not only help in capital appreciation but are also considered a safer investment avenue when compared to other instruments like equity mutual funds.

The purpose of debt funds is to offer low-risk decent returns to its investors. Thus, making it an ideal investment option for conservative investors with a low-risk appetite. The returns from these funds are generally higher than what fixed deposits offer.

Top debt funds FAQs to read before investing

  • What are the different types of debt funds available in India?
  • Dynamic Bond Funds: The fund manager keeps on changing the portfolio composition, investing in securities having a mix of longer and shorter maturity periods. The goal here is to maximise returns.

  • Gilt Funds: These funds invest primarily in government securities that have the lowest credit risk. These funds are considered a secure option since the government won’t default on its debt obligations.

  • Liquid Funds: As the name implies, these funds are highly liquid as they invest in securities with a maximum maturity of 91 days.
  • Short Duration Funds: These invest in debt instruments that have a maturity period between 1 and 3 years

There are other types of debt funds as well, like Ultra Short-term funds, Credit Opportunities funds, Fixed Maturity Plans, etc.

  • What are some of the benefits of investing in debt funds?

Some of the benefits of debt funds are high liquidity, which means investors can sell their holdings in no time. Another benefit is flexibility. Investors can transfer their investments from a debt fund to any equity fund. The returns are usually higher than what bank deposits offer.

  • Are debt funds liquid? If yes, then what is the difference between debt funds and liquid funds?

One of the commonly asked questions on debt funds, many investors are often confused between these two mutual funds. Yes, debt funds offer high liquidity. Liquid funds, on the other hand, are a subset of debt fund wherein fund managers invest in securities maturing in 91 days.

  • How does a debt fund work?

A debt fund raises capital from several retail and institutional investors. This is invested in fixed-income securities to generate returns for investors. The returns don’t vary as much as equity funds since debt instruments carry a fixed rate of returns, thus ideal for risk-averse investors.

  • What are some of the key points you should consider before investing in a debt fund?

Understand the goals and investment horizon of a particular fund first before investing your money. Check whether the fund invests in high credit rating instruments (low-risk) or low credit rating instruments (high-risk). Understand the associated costs like expense ratio and exit load of that fund. See if the investment horizon of the fund matches your financial goals. Consider these factors before you invest in debt funds.

When it comes to making investment decisions, it is better to get all your questions on debt funds clarified. When it comes to growing your wealth, debt funds could be an ideal option if you are looking for fixed returns at a comparatively lower level of risk.

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