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What Is Debt Mutual Funds? Tips For Beginners And Types Of Debt Funds
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For those who are new to the investment field, mutual fund investments are convenient. They are handled by professional fund managers who boasts of decent experience and hold vast knowledge of the instrument. Mutual funds offer a diverse portfolio to the investors. So, the chances of loss are meagre. Also, the asset value rarely drops.
Mutual funds offer something for every kind of investor, be it high-risk appetite or risk-averse individuals. Precisely they are categorised into equity, debt and hybrid funds. Equity funds invest in shares/stocks. Debt funds, in hindsight, invest in Government securities, treasury bills, corporate bonds, etc. Meanwhile, hybrid funds, also known as balanced funds, invest in both equity and debt funds.
What is debt fund? They primarily focus on fixed-income instruments such as Government bonds, treasury bills, corporate securities, etc. Any investment in equities that is less than 65 per cent are considered as debt funds.
The returns from debt mutual funds are dependent on two factors:
• Some of the securities held by debt funds carry a predetermined interest rate. These are called as coupon rates
• The value of the debt fixed-income bonds changes due to the economy interest rate
What are the types of debt funds?
Just like equity funds, debt funds offer an investment option for all kinds of needs:
1) Liquid funds: These are open-ended debt schemes that invest in debt market securities which mature in 91 days. Liquid funds are ideal for investors who wish to park their money for short-term and earn higher returns.
2) Short duration funds: Such open-ended debt schemes invest in money market securities whose Macaulay duration is between 1 to 3 years. Although short-term bond funds provide lower returns, the risk levels are low.
3) Medium duration funds: In this open-ended debt scheme, the bonds Macaulay duration is anywhere between 3 to 4 years.
4) Long duration funds: The Macaulay duration of these open-ended debt bonds and other money market securities are over 7 years.
5) Dynamic bonds: These debt funds invest in schemes that are dynamic, concerning the composition of the bonds and varying tenures. Investors who are looking for a time horizon of 3-4 years, can opt for dynamic funds. The risk levels are also moderate.
While a debt fund offers moderate to high returns, there are some tips that investors have to remember:
1) Risks: Debt funds might be the safest investment option, there are risks involved. The first one is a credit risk. Here the fund manager invests in low-credit securities. The second one is interest rate risk where an increase in the economy rates affects the funds.
2) Time: The choice of a debt fund could vary depending on the time horizon of the investor. If one is looking for 3 months to 1-year investment, liquid funds are perfect. If the investment horizon is 2 to 3 years, consider short-term bonds. If it is anywhere beyond 5 to 7 years, dynamic bonds act as your best ally.
3) Returns: Debt mutual funds do not guarantee higher returns, though they are fixed-income securities. The Net Asset Value (NAV) of such funds fall when the economy interest rate increases.
4) Financial planner: If one has a short or mid-term goal in place, debt funds come handy. They are considered an alternate source of income.
So, if you are a risk-averse individual, debt funds are the best option.
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