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Mutual funds are an ideal investment vehicle for investors who lack the know-how to invest in stocks. There are different kinds of mutual funds, one of which is debt funds. This article elaborates on what are debt funds, so that one can make an informed investment decision.
Let’s begin!
Debt funds are a type of mutual fund scheme that primarily invests in different types of fixed-income securities, such as bonds, treasury bills, etc. As a result, a debt fund offers steady and regular income to investors in the form of debt fund interest rates.
Moreover, as they invest in fixed-income securities, the best debt funds involve less risk than their equity counterparts. That said, they also offer lower returns.
Now that you know what debt funds are, let’s understand how they work –
A debt fund invests in a range of securities depending on their credit rating. Here, the credit rating of a security refers to the risk of default of its issuer. In simpler words, a high credit rating implies that the issuing entity of a security is more likely to pay the principal upon maturity as well as regular interests.
Therefore, fund managers ensure debt funds invest in instruments with a high credit rating, which are less volatile than low-rated ones. Moreover, the performance of a debt mutual fund depends on the investment strategy of its fund manager.
In addition, an economy’s overall interest rate also impacts its performance. This implies that a falling interest rate regime allows a fund manager to invest in long-term securities. On the other hand, in a rising interest rate regime, he/she will invest in short-term securities.
As they invest in fixed-income securities, debt funds that are considered ideal for risk-averse investors who are looking for stable returns. Moreover, as they are less risky than other types of mutual funds, investment in a debt mutual fund can also be suitable for novice or first-time mutual fund investors.
There are several debt fund types, some of which are as below:
Debt fund returns are the interests that investors earn by investing in government securities, bonds, and other fixed-income instruments.
For a clearer understanding of returns on debt funds, take a look at the past performance of the best type of debt funds in 2021 (source):
|
Mutual Fund |
3-Year Returns |
5-Year Returns |
|
ICICI Prudential Multicap Fund |
18.17% |
13.57% |
|
DSP Government Securities Fund |
11.46% |
8.51% |
|
IDFC Government Securities Fund – Constant Maturity Plan |
11.66% |
9.69% |
|
Nippon India Nivesh Lakshya Fund |
11.79% |
NA |
|
Edelweiss Government Securities Fund |
11.35% |
8.62% |
There are a number of risk factors associated with debt funds. These include the following:
There are certain factors investors must keep in mind while investing in debt funds. These include -
On that note, we have reached the end of this article on what are debt funds. We hope that you now have a clearer understanding of debt mutual funds, their types, risk factors, and benefits. Additionally, remember to take the above-mentioned factors before investing.
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Disclaimer: This information is added only for informative purposes and collected from different sources across the Internet. Digit Insurance is not promoting or recommending anything here. Please verify the information before making any decisions.
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