Debt funds are top-rated due to the low-risk factor associated with them. The market’s instruments buy and sell loans for interest. Investors who don’t want to take risks prefer debt funds. Even though it is less risky than equity funds, the returns will also be lower. Before knowing about the 5 ways to invest in a debt fund, let’s see what actually debt funds are.

What Are Debt Funds?

Debt funds are investments in government securities, treasury bills, commercial papers, etc. These investments will generate fixed income. These are called Fixed income securities as the buyer can earn a fixed income on its maturity date. Since market fluctuations won’t affect the returns of the debt funds, the risks for the investors are much lower than in any other investments.

How Does it Work?

Investors will be able to understand default possibilities of principal and interest by following the credit rating of each debt security. The managers of the debt funds study the credit rating and select the top debt instruments. The issuer with a higher credit rating has less probability of defaulting.

Advantages of Debt Mutual Fund Investing

Fixed Returns

Returns from debt funds are assured because they invest primarily in fixed-interest securities. However, there is a slim chance that a debt fund won’t perform as expected; this occurs when the invested securities have a terrible credit rating or the interest rate movement is harmful.

Strong Liquidity

Debt funds, such as overnight or liquid funds, have historically provided the best short-term returns. Due to their high liquidity, these funds make the ideal haven for cash sitting around. The units can be redeemed at the buyer’s convenience.

Higher Returns Compared to Conventional Saving Methods

Funds have historically performed well compared to the earnings provided by conventional saving strategies like Savings Accounts or Bank Debt.

Over the years, savings accounts have often produced yearly returns of 4% to 5%, whereas liquid investments have typically produced returns of 7%. They are a superior alternative to savings accounts because they offer immediate redemption.

Diversification

It is advised to build your investment portfolio as diversified as you can when it comes to investing. Effective risk management begins with a diversified portfolio. Instead of focusing on a single debt security, it is advised to invest in a debt fund that has a suitable allocation to various money market products.

Professional Management

Investing in a debt fund, where a seasoned fund manager creates a portfolio of several assets after thoroughly analyzing market trends and interest rate fluctuations, is advised instead of picking debt security to buy on your own.

These Are Some Ways in Which You Can Invest in Debt Funds

Gilt Funds

These funds make investments in all varieties of public debt, including state and federal government bonds and those issued by the central bank on behalf of the federal government. Gilt funds bear no default risk because they invest in government-backed securities. That does not imply they are free of risk from everything, though. Interest rate concerns could be a problem. Since they are most susceptible to changes in interest rates, long-term gilt funds are the riskiest among debt funds.

Short-Term Funds

They invest in debt securities like bonds with a three to six-month maturity, commercial papers, and certificates of deposits. The returns profile is often stable because they are unaffected by fluctuations in interest rates. However, they typically offer higher returns because they invest in papers with a little longer tenure than liquid funds.

Income Funds

These funds spread their capital among various debt securities, including bonds and government securities. Furthermore, they can invest in both short-term instruments with maturity periods of one to two years and long-term tenure papers with maturities of up to 20 years. These funds regularly bet risky depending on the interest rates to profit from rate changes. Since these funds carry a high-interest rate risk, it is best suited for long-term investors with a high tolerance for risk. If you wish to profit from both scenarios of growing and falling interest rates, invest in these funds.

Fixed Maturity Plans

A fixed tenure applies to FMPs. They make investments in papers with a similar maturity. They are generally kept until maturity, eliminating the danger of changing interest rates. The fund’s net asset value is unaffected by changes in interest rates. Despite not being guaranteed, FMPs produce comparatively predictable returns. If the interest rates at maturity are lower, an investing risk is present.

Liquid Funds

These funds usually invest in highly liquid money market securities such as Treasury Bills, interbank call stocks and shares, Commercial Papers, and Certificates of Deposit, as their name would imply. Among debt funds, these funds’ returns are the most consistent. If you intend to store your spare funds, these offer quick liquidity and may even be utilized as a replacement for a savings account. Individuals with considerable cash sitting idly in banks and who want to earn better returns than just what banks are willing to offer should consider liquid funds.

Conclusion

Debt mutual funds are a choice worth considering if you’re searching for relatively constant income compared to equity and lesser market risk. Depending on your investment objectives and time, you can choose from various debt fund types, including liquid funds, ultra-short-term debt funds, fixed maturity plans, etc. It is always better to meet with a trusted financial expert and talk to him before deciding on investments.