Meaning of Debt Mutual Fund.
Meaning of Debt Mutual Fund.
Based on the ‘investment objective’, the mutual fund schemes can be broadly classified as either Equity Funds or Debt Funds. This classification is based on the asset allocation of the fund’s investments.
While equity mutual funds invest in shares of publicly listed companies, debt funds invest in fixed income securities issued by the government and companies. These fixed income securities include corporate bonds, government securities, treasury bills, money market instruments and other such debt securities.
Debt funds invest in such fixed income securities, and just like equity funds, they try to optimise returns by diversifying across different types of securities. This allows debt funds to earn decent returns, but there is no guarantee of returns. However, debt fund returns can be expected in a predictable range, which makes them safer avenues for conservative investors.
Types:
Debt funds invest in different securities that have different credit ratings. A security’s credit rating signifies the risk associated with the entity that is issuing the security. A higher credit rating means that the entity is more likely to pay interest on the debt security as well as pay back the principal amount upon maturity. This is why debt funds that invest in higher-rated securities will be less volatile than those that invest in low-rated securities.
Another factor that determines the kind of securities that debt funds invest in is the maturity of that security. Different types of debt funds invest in securities that mature after different time periods. The shorter the maturity period, the less volatile the debt security can be expected to be.
Just like equity mutual funds, debt mutual funds also come in various types. The primary differentiating factor between debt funds is the maturity period of the instruments they invest in. Here are the different types of debt funds.
Income funds
Income funds can also take a call on interest rates and invest in debt securities with different maturities, but most often, income funds invest in securities that have long maturities. This makes them more stable than dynamic bond funds. The average maturity of income funds is around 5-6 years.
Short-term and ultra short-term debt funds
These are debt funds that invest in instruments with shorter maturities, which range from around a year to 3 years. Short-term funds are ideal for conservative investors as these funds are not majorly affected by interest rate movements.
Liquid funds
Liquid funds invest in debt instruments with a maturity of not more than 91 days. This makes them almost risk-free. Liquid funds have seen negative returns very rarely. These funds are good alternatives to savings bank accounts as they provide similar liquidity and higher returns. Many mutual fund companies offer instant redemptions on liquid fund investments through special debit cards.
Gilt funds
Gilt funds invest in only government securities. Government securities are high-rated securities and don’t come with a credit risk because the government is not going to default on the loan it takes in the form of debt instruments. This makes gilt funds ideal for risk-averse fixed income investors.
Credit opportunities funds
These are relatively newer debt funds. Unlike other debt funds, credit opportunities funds don’t invest according to the maturities of debt instruments. These funds try to earn higher returns by taking a call on credit risks. These funds try to hold lower-rated bonds that come with higher interest rates. Credit opportunities funds are relatively riskier debt funds.
Fixed maturity plans
Fixed maturity plans (FMP) are closed-end debt funds. These funds also invest in fixed income securities like corporate bonds and government securities, but they come with a lock-in. All FMPs have a fixed horizon for which your money will be locked-in. This horizon can be in months or years. Investments in FMPs can be made only during the initial offer period. An FMP is like a fixed deposit that can deliver superior, tax-efficient returns but do not guarantee returns.
Meaning of Debt Mutual Fund.
www.wealthhunterIndia.com, Call Us Now and get ahead financially: 9717033377, 9910089543
Wealthhunterindia.com is one of the leading financial services provider in India offering range solutions that meet various customer needs through various financial products like Mutual Fund, Insurance, Fixed Deposit, and Loans.
Started in the year 2003, Wealthhunterindia.com is today an established name in the financial service provider market of India.
Call Us Now and get ahead financially: 9717033377, 9910089542
www.wealthhunterIndia.com
