A debt fund is a mutual fund investing in fixed-income instruments like Corporate and Government Bonds, money market instruments etc. Debt funds offer interest along with capital appreciation. These fixed-income funds are used as a hedge against equity.
Types of debt funds:
1. Liquid debt funds
Liquid fund lends to companies for 91 days. Liquid Funds are less risky than ultra-short-term debt funds due to their lower maturity period. These funds are highly liquid; some even allow the investor to redeem up to Rs 50,000 per day. Moreover, liquid funds do not come with an exit load.
2. Overnight debt funds
The overnight fund, as the name suggests, invests in securities with a maturity period of one day. The flexible holding period and low cost of overnight funds make them one of the go-to investment avenues for many debt fund investors.
3. Ultra-short-duration funds
Ultra-short duration fund invests in debt instruments and securities for 3-6 months.
4. Low-duration funds
Low Duration fund invests in debt securities for 6-12 months.
5. Short-duration funds
Short Duration Fund invests in debt securities for 1-3 years
6. Medium-duration funds
A Medium Duration Fund invests in debt securities for 3-4 years.
7. Dynamic bond debt funds
Dynamic bond funds invest in debt and money market instruments for different durations. Since the maturity period is not fixed for such funds; they are potentially high-risk investments
8. Corporate bond funds
A Corporate Bond Fund invests in bonds rated AA+ and above. Investors with a low-risk appetite can invest in corporate bond funds.
9. Credit risk funds
A credit Risk Fund is a security that invests in bonds or companies with lower credit ratings. These companies usually provide high-interest rates but also come with hefty risks. The nature of credit risk funds is opposite to corporate bond funds, which invest in companies with a stable credit rating.
10. Banking & PSU funds
Banking and PSU debt funds invest in securities issued by banks, public financial institutions and PSU(Public Sector Undertakings). As per the SEBI guidelines, banking and PSU Funds must invest 80% of their assets in these securities. These funds have a better credit quality compared to other debt instruments.
11. Money market funds
A money market fund invests in short-term debt securities, mostly for one year. They are less volatile and come with minimal risk. One can invest in it if one wants to create an emergency fund.
12. Gilt funds
Gild funds mostly invest in government securities. They are invested in gaining long-term returns. While gilt funds are free of credit risk, their returns can fluctuate due to changes in interest rates. Hence, one should invest in gilt funds if looking for stable returns that beat the fixed deposit.
Why invest in debt funds:
Debt funds offer consistent income in the form of interest payments and capital appreciation. Moreover, they are also tax efficient due to their indexation benefits when held for more than 3 years.
Fun Fact: When you subtract your age from 100, the difference is the ideal percentage of investment that one should invest in equity. The rest of it is advised to invest in debt funds. For instance, a person aged 25 should invest 75% of their equity investment and 25% in debt. As age increases, the risk appetite decreases, and debt funds are poised as a safer investment option.
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