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What do debt funds invest in?

By Finserv MARKETS - Aug 2,2019
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What do debt funds invest in

Mutual funds investment in India is growing rapidly with rising incomes and a flourishing middle class. More people are becoming aware of investing in mutual funds thanks to initiatives such as the ‘Mutual Funds Sahi Hai’ campaign by the Association of Mutual Funds in India (AMFI) which added 32 lakh new investors in 2017 alone.

Mutual funds provide investors with an array of investment options that are customized according to their income, investment goals, investment horizon and risk appetite. The wide options for investment and easy liquidity make mutual funds a very friendly and profitable investment instrument for millions of Indians.

Types of Mutual Funds

There are several types of mutual fundsand each is classified according to structure, asset class, investment goals, risk and speciality. Some of the major types of mutual funds include:

Funds by Asset Class:

  • Equity funds

  • Debt funds

  • Money market funds

  • Hybrid funds

Funds by structure:

  • Open-ended funds

  • Closed-ended funds

  • Interval funds

Funds by investment goals:

  • Growth funds

  • Income funds

  • Liquid funds

  • Tax-saving funds

What are debt mutual funds?

A debt mutual fund is invested in debt instruments such as government securities, corporate bonds, treasury bills, commercial paper and other money market instruments. Similar to any other type of mutual fund, a debt mutual fund is overseen by a fund manager who decides the debt instruments to invest the fund. They select these debt instruments based on credit ratings for these securities.

Many retail investors don’t realise that while equity markets and equity funds garner all their attention, the debt fund market is the place where bigger action is taking place driven by smart institutional investors.

To find the right debt mutual fund where you can invest your hard-earned money, you have to either take help of an investment advisor or do your own research. If you want to save the extra time and money spent on the above, head to Finserv MARKETS for top-rated debt mutual funds as per Morningstar rankings and see your wealth grow without much effort.

What are the types of debt mutual funds?

Debt mutual funds are classified by their maturity periods and they include the following:

  • Income funds
  • Liquid funds
  • Dynamic bond funds
  • Short-term and ultra-short-term debt funds
  • Gilt funds
  • Credit opportunities funds (does not depend on maturity)
  • Fixed maturity plans

Where to debt funds invest in?

As mentioned above, a debt mutual fund invests on debt instruments such as treasury bills, corporate bonds, government securities, commercial paper and other money market instruments.

In a debt fund, the asset management company (AMC) or the mutual fund company invests in a bond or an instrument. The debt fund then has to declare the value of its portfolio after deducting costs daily and each unit of value of the portfolio is called NAV or net asset value.

Where a debt fund will invest will depend upon its classification. Below we will discuss the various types of debt mutual funds and how the money is invested in debt instruments to fetch higher returns.

Income funds: Generally, income funds invest in securities with longer maturities such as 5-6 years. The longer maturity makes it more stable than dynamic bond funds.

Liquid funds: Though liquid funds have a maturity not more than 91 days, it’s one of the most reliable of debt funds. Investors rarely face negative returns when invested in this debt instrument. They provide liquidity similar to a bank account with higher returns on investment.

Dynamic bond funds: A dynamic bond fund is one where the fund manager constantly changes the portfolio to offset or benefit from a changing interest rate regime.

Gilt funds: Gilt debt funds limit themselves to investing only on high-rated government securities with minimal credit risk. It’s an ideal investment avenue for risk-averse investors because the government rarely defaults on these loans.

Credit opportunities funds: Credit opportunities fund is a debt fund that doesn’t invest according to the debt instrument’s maturity. It holds lower-rated bonds with higher interest rates to maximize returns, hence are riskier than other debt funds.

Fixed maturity plans: FMPs is a debt fund that invests in fixed income securities like corporate bonds and government securities. Fixed maturity plans as the name suggests have a fixed lock-in period (in months or years). It is similar to a fixed deposit with superior returns.

Understand the risks before you invest in debt mutual funds because they don’t guarantee returns similar to a fixed deposit in a bank. Debt fund investments are ideal in a falling interest regime because that is when its net asset value (NAV) rises. Keep your investment horizon, the expense ratio of the fund, financial goals and tax gains in mind before you invest in any type of mutual fund.

If you are looking for the right place to invest in mutual funds, Finserv MARKETS has top rated mutual fundsas per Morningstar ratings. When you buy mutual funds onlinefrom Finserv MARKETS, you can grow your wealth with goal-based customized offers, easy and free account set up, and zero brokerages and commissions.

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