A debt fund is one of the many categories of mutual funds. Like equity funds, this is also a popular way to invest. Debt fund schemes are low risk. Debt funds are also of any type.
I will guide you step by step in understanding the concept of Debt Fund, you just fresh your mind and leave your full attention to this article What is Debt Fund — Type of Debt Mutual Funds. First of all, look at this list so that you can know which point I am going to share with you.
What is Debt Fund
What are the types of Debt Fund
What is the risk of Debt Fund
What are the advantages of Debt Fund
What is Debt Fund
Debt means loan. For example, if someone wants to build his house, he takes a loan from the bank. In return, the bank has to pay interest. Similarly, when an investor invests in debt funds, they also get interested.
Inequity fund you buy shares of the company directly, but in a debt fund, you give loans to the government, business, and financial institutions.
You come, why does the government need a loan? Sometimes the government also gets short of money, then the government takes treasury bills, bond issue core loans. Treasury bills are issued for less than one year period and bonds for the long term.
Business needs loans for expenses purposes. commercial paper for one year less Abdi. Corporate bonds are issued for a long period of time. Financial institutions take loans to grow their business. For this, the issue certificates of deposit and perpetual bonds.
What are the types of Debt Fund?
There are different types of debt funds. First, you have to decide how long is your investment. I am telling you which debt fund is suitable for you according to the time.
Liquid Fund:- If your investment goal is for 1–90 days, then you can invest in a liquid fund. Because the interest of the liquid fund is more than that of the bank account. The safest investment of mutual funds is a liquid fund. You can withdraw your money whenever you want. Its maturity period takes place in 91 days.
Ultra short-term funds:- If your investment is for Abdi 3–6 months then you can go to this fund. Talking about return, it has given 6.5–7.5% return on annual basis in the last 6 months. This fund invests in treasury bills and commercial paper. Government issues treasury bills. The commercial paper is issued by the corporate.
Overnight fund:- As the name suggests, this is an overnight fund. This fund invests in such security whose maturity is for one day. This is an open-ended scheme.
Low duration fund:- The investment strategy of this fund is in the debt and money market. This is an open-ended scheme. Those whose time horizon is 6 to 12 months can invest in this fund.
Medium duration fund:- The investment instrument of this fund is in the debt and money market. It is an open-ended medium-term debt scheme. One can invest in these for three to four years.
Medium to long-duration fund:- Its investment is also done in the debt and money market. It is an open-ended medium-term scheme. You can invest in it for four to seven years.
Long Duration Fund:- If your time horizon is for a long time then you can invest in this fund. This fund will be good for more than seven years.
Corporate Bond Fund:- Corporate bond fund is an open-ended debt scheme, wherein 80% of the total assets are invested in highly rated corporate bonds. These mutual funds provide high returns and reduce the risk by investing in high-end instruments.
Credit Risk Fund:- In this also 65% of the total assets are invested in corporate bonds. It is an open-ended debt scheme. These funds produce higher returns by taking on higher credit risk and investing in lower-rated instruments.
Gilt fund:- In this category, 80% of the total asset is invested in different securities of the government. Investors do not face any kind of credit risk after investing in Gilt Funds, as the government itself takes responsibility for it. But there is a risk of return in this.
Floater Fund:- In this category, 65% of the total assets are invested in floating rate instruments.
Banking and PSU fund:- This is an open-ended debt scheme. Even 80% of its total assets are invested in banks, public sector undertakings, financial institutions.
Dynamic fund:- I kept this fund at the end because the risk is a bit high in it. This fund is for those who want to take a high risk with a high return, the fund manager keeps on changing the portfolio according to the changing interest. Due to one mistake of the fund manager, investors can lose money.
What is the risk of a Debt Fund?
Generally, the investor feels that debt funds are risk-free, but credit risk and interest risk remain in debt funds as well.
Credit Risk:- aaa/aa rating is known for high security. If the fund manager invests in a fund with an aaa/aa rating, then you will get interested in it as well as your full capital will also be available after maturity. But there is interest flame in this.
But bb/b/ccc rating is a high risk, the chances of default in this type of fund are very high. in the fund, Managers invest in low-rated instruments to earn more interest. I will advise you if you do not invest money in this kind of low rating fund, otherwise, your capital can also be negative.
Interest Rate Risk:- Interest risk remains in debt funds, so you get full security in government bonds. Because there is no trading in the market. But for high profits, fund managers invest money in corporate bonds. Which is trading in the market.
You need to know that there is a relation between the bond and the interest rate, if the rate of interest increases then the price of the bond falls, if the price of the bond increases then the rate of interest decreases. If you want me to get a fixed interest in which there is no risk, then you can invest in rbi government bonds, in this you will get a little low interest but your capital will be safe.
What are the advantages of a Debt Fund?
Debt mutual funds can prove to be good for investors who are afraid to invest in equity funds, but want better returns than FDs and also get tax benefits.
You must definitely note this important point, before investing, you do not do the research yourself, otherwise, you should invest with the help of a good financial advisor.
I hope you liked my article What is Debt Fund — Type of Debt Mutual Funds. If you have any queries regarding this article, then you can ask, I will definitely answer that query. One more thing please share this post with your friends and relatives.
