What Are Debt Funds & How Do They Work?

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What Are Debt Funds & How do they Work?

Debt Funds or Debt Mutual Funds  primarily invest the money in fixed-income securities like government securities, debentures, corporate bonds and other money-market instruments. These funds lower their risk by investing in such avenues. They have relatively low volatility and generate risk adjusted returns over time.

How do Debt Funds Work?

These funds invest in instruments such as Bonds and fixed income securities to generate returns for the investors. These funds buy these instruments and earn interest on the money. The yield that the investors receive is based on this.

The portfolio of debt funds needs to have specific maturity ranges. For example, a liquid fund can buy only securities which have maturities of upto 91 days. They do not offer assured or fixed returns, unlike FDs. Their returns can fluctuate. A rise in interest rate positively impacts on the interest income but negative impact on the bond or instrument price. And it’s the other way round when the interest rates fall.  

What are different types of debt funds?

 

This category of funds are considered the least risky among the mutual funds. As the name suggests, they are highly liquid. The portfolio of this fund comprises instruments that have a maturity period of not more than 91 days.  

 

In this fund, the fund manager changes the maturity of the portfolio depending upon the forecast of the interest rates. If the forecast indicates a rising interest rate, then the maturity will be longer. If the forecast is indicating a falling interest rate, then the maturity will be a shorter duration.

 

  • Short / Medium / Long Term funds

 Short term Funds come with a maturity period of 1 to 3 years. The portfolio in these funds are structured such that their prices are not much impacted by the change in interest rate movements.

Medium Term debt funds have a maturity period of upto 3 to 5 years, and long-term debt funds have maturity beyond 5 years. These are riskier than short-term as their tenure is longer; hence more significant is the impact of the interest rate on the portfolio, which is also known as interest rate risk or duration risk.

 

  • Fixed Maturity Plans

These schemes are closed-ended schemes. But can be traded on stock exchange where they are listed.

Debt funds are ideal for investors seeking moderate risk as the risk of investing in debt mutual funds is generally lower than in equity mutual funds. Debt funds can be the right choice for anyone having a lower appetite for risk. You can invest in a debt fund if you have a surplus fund or want to diversify your investment portfolio, or think of making an emergency fund. Debt funds can also diversify the overall portfolio risk if your allocation towards the equities are on a higher side.

Disclaimer: The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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Keywords: debt mutual fund,type of debt funds,liquid fund,dynamic bond fund

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