What are debt mutual funds and who should invest?
Debt mutual funds are investment schemes that pool money from investors and invest in fixed-income instruments such as government and corporate bonds, money market instruments and corporate debt securities. Debt mutual funds are also known as bond funds or fixed-income funds. They are an excellent choice for people looking for a steady and relatively low-risk investment avenue.
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Though not completely risk-free, they are popular among conservative investors who want to preserve their money and generate moderate, predictable returns. The manager of a debt fund purchases listed or unlisted debt instruments at a specific price. Then the fund manager sells them at a margin, which increases or decreases the fund’s worth.
These funds provide diversification benefits by investing in a variety of debt securities with different maturities, credit ratings and issuers. This diversification spreads risk across multiple assets. It often offers liquidity to investors, allowing them to buy and sell fund units at current market prices. However, liquidity might vary based on the type and maturity of the underlying securities.
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Who should invest in a debt fund?
Medium-term investors: People with a medium-term investing horizon of 3-5 years can choose debt schemes. Dynamic bond funds are ideal for such investors since they provide higher returns than fixed deposits and short-term bond funds. If a person prefers monthly payouts, they can also select a monthly income plan.
Short-term investors: Individuals with a 3-12 month investment horizon should consider investing in debt funds. It is a better option for holding funds than a traditional savings account. They can consider investing in liquid funds, which typically provide yearly returns of 6-7%.
Benefits of investing in debt mutual funds
- Debt funds often invest in fixed-income securities, which provide predictable and relatively consistent returns compared to equity-based instruments.
- These funds spread capital among multiple debt instruments that reduce the impact of a single security’s performance on overall returns.
- These funds focus on bonds and government securities, so they are less volatile and subject to market fluctuations.
- Experienced fund managers handle asset selection and portfolio changes, saving you time and effort from conducting individual bond research.
- Over particular holding periods, capital gains on debt funds may earn favourable tax treatment than interest received on fixed deposits.
- Most debt funds have a redemption option, giving you instant access to your money in need.
- A variety of categories, like liquid funds for short-term needs and corporate bond funds for medium-term needs, allow you to connect your investments with specific objectives.
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(Edited by : Shoma Bhattacharjee)
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