The recent years have seen more and more investors considering investing in mutual funds to meet their goals and build wealth. These market-linked investment vehiclescan help you create wealth in the long run and also save tax. Plus, they are professionally managed and offer benefits of diversification. Broadly, there are three major types of mutual funds – equity funds, debt mutual funds and hybrid funds.
In this article, we talk about debt funds, its types and benefits to help you make the right fund choice.
Understanding debt funds
Debt funds invest in fixed-income bearing instruments such as government securities, certificates of deposits, treasury bills, corporate bonds and more. These mutual funds are well-suited for risk-averse investors, i.e.,those with a low to moderate risk tolerance level and want steady returns. Debt funds are not exposed to market volatility, which makes themmore stable than equity funds. However, debt funds, including debt hybrid funds, are susceptible to other risks such as interest-rate and credit risks.
Types of debt funds
Following are the different types of debt funds based on an investor’s risk appetite and investment horizon.
- Liquid and money market funds
These funds are ideal for investors looking to invest for short periods. They invest in debt securities and highlyliquidmoney-market instruments with tenures as short as one day.
- Income funds
Income funds are aimed towards investors with long-term investment horizons and good risk appetite. Typically, they invest in a wide array of debt instruments with varying maturities and issuers. These instruments have long to medium-term maturities.
- Short-term debt funds
These funds invest in debt instruments for a short term, usually up to three years. When interest rates are high, these funds tend to perform well.
- Floating rate funds
These funds primarily invest in instruments which offer a floating rate of interest. They are linked to a benchmark rate for debt instruments such as Mumbai Interbank Offer Rate.
Benefits of investing in debt funds
Here are some advantages you can enjoy by investing in debt funds.
- Not exposed to market fluctuations
When you invest in debt funds, you are aware of its fixed rate of return and maturity date. Unlike equity funds, debt funds are not subject to market conditions, and the returns are not impacted by it.
- Ideal for beginner investors
Since debt funds invest in fixedinterest-bearing securities, they could serve as an ideal investment option for new investors looking for regular returns with minimal risks.
- Offer great liquidity
Debt funds are liquid and can be used to build an emergency corpus. You can quickly redeem your funds any time you wish.
Conclusion
Now that you know about debt mutual funds, its types and benefits of investing in them, you can commence on your mutual fund investment journey. Choose the right debt funds that coincide with your investment horizon and meet your financial goals.
