Investors in mutual fund schemes have two different objectives. One type has the objective of earning higher returns, and conversely, the other type has the objective of earning a stable and regular income. To earn higher, as an investor, you need to be prepared to take risks. Conversely, for a stable and consistent revenue, there won’t be as many risks involved. There are many types of mutual funds that are available to cater to the needs of both types of investors. One of these variants is debt funds, which are known for catering to the needs of investors who seek comparatively lesser risks and consistent revenue.
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What are debt funds?
Debt funds, which are also referred to as fixed-income funds, are known for allocating a significant portion of funds to fixed-income securities like debentures, corporate bonds, government securities, and other money-market instruments. By opting to allocate investors’ funds to such avenues, debt mutual funds are known for reducing the risk factor considerably. Debt funds are known for being a relatively stable investment avenue that could help in generating wealth.
Why invest in debt funds?
Listed below are the reasons why you should consider allocating funds to debt funds:
- Debt funds are known for offering stable revenue:
Imagine that after freshly entering the job market, you decide to invest in the market to accumulate wealth in the future. Debt funds will be the ideal option in case you are seeking an investment tool that may provide you with income at regular intervals. As stated earlier, this type of mutual fund is known for investing in securities like corporate bonds, treasury bills, commercial papers, government securities, and several other types of money market instruments. Allocating funds to these securities is considered smart as they generate income regularly. Mostly, the oscillations in the market don’t have an impact on the income of debt funds.
- Market fluctuations don’t have an impact on the performance:
Under debt funds, a portfolio manager chooses to invest your money into fixed-income securities like commercial papers, treasury bills, corporate bonds, and government bonds. These securities are known for providing money to investors regularly. Moreover, regardless of the market condition, investors can enjoy income earned off the scheme regularly. If you were to opt for a debt mutual fund and the market is not performing very well, don’t worry, the market’s low performance will not have an impact on your revenue.
- These funds are very liquid:
Another major benefit of debt funds is that they don’t have any specific lock-in period. If you have opted for an investment scheme that comes with a lock-in period, and a situation arises where you are in urgent need of cash before the maturity period, you may be penalized. Conversely, if you were to opt to invest in debt funds and want to liquidate them, you can do it. However, before liquidating it, please check if there is an exit load i.e., a charge that will be deducted if the fund is liquidated before it reaches the maturity period.
Are there any variants of debt funds?
Yes, there are different types of debt funds that are available as an investment option. Listed below are some of them:
- Short/mid/long-term funds:
Short-term debt funds are known for coming with a maturity period of 1 to 3 years. They are known for being suitable for investors that have a low-risk appetite. Their prices are not much impacted by the change in interest-rate movements which are also referred to as interest rate risk. Mid-term funds have a portfolio maturity of 3-5 years and long-term ones have a maturity beyond 5 years. Mid and long-term funds are known for being relatively riskier than short-term ones because the longer the tenure, the larger the impact of interest rates on the portfolio.
- Liquid funds:
By the name, liquid funds are known for being highly liquid. These funds are known for investing primarily in debt instruments that have a maturity period of not more than 91 days. These funds are supposedly among the least risky when it comes to mutual funds.
- Dynamic bond funds:
Under these funds, a fund manager chooses to change the maturity of the portfolio depending upon their forecast of the interest rates. If the forecast predicts a rise in interest rates, the maturity is shorter. Conversely, if the forecast is falling interest rates, the maturity is longer. These funds are known for coming with a fluctuating maturity period. They opt to allocate funds to instruments that come with both shorter (1-3 years) and longer (3-5 years) maturities. However, these funds are slightly riskier than short-term debt funds.
- Fixed Maturity Plans:
This type of debt fund is known for coming with a lock-in period. However, the said lock-in period can be different based on the scheme you choose. Funds can be allocated in a fixed maturity plan only during the initial offer period and, after that, funds cannot be invested any further in this scheme. As they come with a lock-in period, investors consider fixed maturity plans like FDs. However, unlike FDs, fixed maturity plans do not promise fixed returns.
These funds are known for being suitable for investors who are interested in taking moderate risks. The risk of investing in debt mutual funds is known for being lower than the risks involved in other mutual funds.
