Debt Funds, Types, Benefits and Risks

Debt Funds, Types, Benefits and Risks

Debt funds are a combination of debt instruments fixed income securities like treasury bills or corporate bonds etc. Debt mutual fund invests in a variety of securities with assigned credit rating and assigned credit rating show the ability of a company to pay back its debt. Debt fund allows investors to multiple types of securities and investors can have a diversified portfolio. Diversification of portfolio allows getting optimum returns from their investments. Debt funds are very stable and have very less volatility. Returns of debt funds can be predictable at the beginning of investment so this makes debt funds most favoured investment opportunity for conservation investors who have a low-risk tolerance.

Types of Debt Funds

Liquid fund – These type of debt funds have high liquidity and which can be converted into cash within 24-48 hours. Liquid funds schemes invest in securities which have very high liquidity such as Treasury Bills, Certificate of Deposit (CDs) and Commercial papers (CPs) etc. Liquid funds are highly stable and can be a good investment option for conservative investors.

Monthly income plans (MIPs) – Monthly income plans (MIPs) funds are very stable and beneficial for long term investment. MIPs are a combination of both equity and fixed income securities while 85%-90% portion of the asset is invested in fixed income securities and 10%-15% in equity.

Short duration fund – Short duration funds are a good option for those investors who won’t invest their money for a short period of time (3-12 months). These schemes can offer you up to 7%-9% returns in a short duration of investment while is very hard to get that much returns in any other scheme in a short period of time.

Medium duration fund – Medium duration funds can be very beneficial for those investors who are looking to invest their money for the medium duration (3-5 years). Medium duration funds offer more returns and benefits in comparison with other medium duration schemes, also medium duration fund has monthly income plans which can offer you monthly income on your investment.

Corporate bond fund – Corporate bond fund offers stable and risk-free returns to the investors who have a desire to invest in high-quality corporate bonds. In these schemes, minimum 80% portion of the asset is invested high rated corporate instruments.

Banking and PSU fund – Banking and PSU fund schemes are very stable and safe and can offer decent returns. In these schemes, minimum 80% portion of assets is invested in Banking Public Sector Undertaking and Public Financial Institutions.

Dynamic bond fund – Dynamic bond fund schemes invest money in debt instruments of multiple durations which can provide the best possible returns to its investors. Maturity period of these debt instruments vary from 3-5 years and these schemes contain low to moderate risks.

Benefits of Debt Funds

Safe returns – Debt funds are considered to be the best instruments if you want to earn higher returns on your investment such as fixed deposits and recurring deposits. Debt funds offer you a high amount of returns without volatility, debt funds are best options to earn good returns without exposing your money to the volatile share market.

Flexibility – Debt funds offer you high flexibility on your investment. Liquid fund schemes provide you with more flexibility than fixed deposits. In monthly income plans money can be withdrawn each month as per usage which is beneficial for retired peopled and peoples who need money every month.

Stabilise portfolio – Debt instruments can be used to bring stability to your portfolio because debt instruments have lower risks as compare to equity instruments so debt instruments can work as a protective shield to protect to gains for equity loss or can minimize loss. Combination of debt instruments with equity instruments in portfolio can offer good risk and reward ratio.
Great option for new investors – New investors usually want to start with low-risk schemes to protect their money from any major loss. Debt instruments provide you small but steady returns as compare to equity instruments and debt instruments protect beginners from volatile market crashes.

Risks of Debt Funds

Expense ratio – Expense ratio is an important aspect in debt instruments because expense ratio is fees which fund managers and broker houses charge for managing your debt instruments. Meanwhile, returns from debt instruments are not very high so it can dent your overall gains if you have to pay a high expense ratio. It is always suggested to invest your through those broker house which has least expense ratio charges or you can choose those schemes which have lower expense ratio and keep your money invested in those schemes for a long time.

Lower returns – Debt funds offer lower returns as compared to equity funds but also there is no guarantee of returns in many schemes. NAV of debt funds also fluctuates when the rate of interests are changed so it is important to choose debt fund scheme all studying all the parameters.

Three risks are the following:

Interest-rate risk – Debt funds invest in interest-bearing instruments and securities so their NAVs usually fluctuate when interest rate change. Value of these funds declines when interest rates rise.

Credit risk – Debt funds are subject to credit risk it is the rick when the issuer of funds not paying the payment and interest.

Liquidity risk – It is the risk when funds are not having demand for redemption so cause lack of liquidity which make it hard to get cashback into account.

Conclusion

Every debt fund is subjected to some type of risks so it is necessary to get professional advice before investing in debt funds. You must start your investments with small amounts once you become an experienced investor then you can invest in debt funds as per your financial goals.

Team R Wealth

Team R Wealth

Related Posts

Leave A Reply

Your email address will not be published.