What is Debt Mutual Fund?: Debt mutual fund invests a significant portion of the money in the fixed-income securities like debentures, corporate bonds, treasury bills, government securities and other money-market instruments. By investing in such kinds of securities, debt mutual fund provides the risk factor to be lower for the investors. This is the stable instruments for the investors in order to generate investment income that will help in order to generate wealth.

The main reason for the investors that invest in such types of funds is that they want to earn the interest income and the capital appreciation on the particular asset or security. The issuers of the debt instrument pre-determine the interest rate that will be received by the individual till the maturity period. Therefore, it is also term as “fixed-income” securities.

How do Debt Funds Work?

Debt mutual funds invest in the various securities that are based on credit ratings. The difference between the cost and sale price of the accounts for the appreciation or the depreciation in the fund’s net asset value (NAV). From these funds, you can also receive periodic interest income from the underlying debt instruments in which they made the investment.

The interest income gets added to the debt fund on a regular basis. A security’s credit rating gives the idea whether the issuer will make the payments incorrect time as they promised. The fund manager of the debt mutual fund ensures that he will invest in the high rated credit instruments. The higher credit rating means that the entity or the issuer will more likely to pay the interest on the debt instruments within the time-period they had decided up to the maturity period.

Debt mutual funds which are investing in the higher-rated securities or the assets are less volatile with comparison to that of with the low rated securities. Maturity depends on the investment strategy of the active or passive fund manager and on the overall interest rate regime in the economy. If the interest rate regime is falling it means the fund manager will get encouraged for investing in long-term securities. If the interest rate regime is rising then the manager will be influenced for investing in the short term securities.

Types of Debt Mutual Funds

  • Income Funds
  • Dynamic Bond Funds
  • Liquid Funds
  • Floating Rate Funds
  • Monthly Income Plan
  • Capital Protection-Oriented Funds
  • Multiple Yield Funds
  • Interval Funds
  • Short-Term and Ultra Short-Term Debt Funds
  • Gilt Funds
  • Fixed Maturity Plans
  • Credit Opportunities Funds

Who Should Invest in Debt Funds?

Debt mutual funds try to optimize the returns by investing across all the classes of the securities. The debt funds to earn decent returns and the returns are not guaranteed. This is suitable for that kind of investors with short-term and medium-term investment horizons. Short-term ranges from 3 months to 1 year, while the medium-term ranges from the 3 years to 5 years.

1. Short-Term Debt Mutual Funds

For the short-term investor, debt funds are like the liquid funds that may be an ideal investment with a comparison of the money that one’s keep in the saving bank account. Liquid funds offer a higher rate of return with the range of 7-9% with the same kind of liquidity you need for the emergency requirements.

2. Medium-Term Debt Mutual Funds

For the medium-term investor, debt funds like the dynamic bond funds are opted for enjoying the interest rate volatility. When making the comparison to the 5-year bank FD’s, debt bond funds are offering the higher returns. If the individual need to earn a regular income from the investments then the monthly income plays are a good option for this.

Things to consider being a Trader or an Investor

  1. Risk
  2. Return
  3. Cost
  4. Investment Horizon
  5. Tax on Gains
  6. Financial Goals

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The blog on “What is Debt Mutual Fund?” defines the definition, working, types of the debt mutual fund. Further, through this article, we had also mentioned about the consideration that the trader or the investor should make an account on it. Trading Fuel is our blog site which gives the information and the materials about the financial topic that is on the stock market. There are many topics that we had updated on the stock market with different headings like IPO, technical analysis, intraday trading and many more. You can also share your feedback or words to us through the e-mail id. Read more and stay updated with us.

Author

Prashant Raut is a successful professional stock market trader. He is an expert in understanding and analyzing technical charts. With his 8 years of experience and expertise, he delivers webinars on stock market concepts. He also bags the ‘Golden Book of World Record’ for having the highest number of people attending his webinar on share trading.