What are debt mutual funds?
Debt mutual funds are schemes which invest in fixed income instruments, like treasury bills, government securities, corporate debt securities and money market instruments which offer capital appreciation. The scheme is also known as debt funds or fixed income funds.
If you are seeking a regular income and are a risk-averse investor, debt mutual funds are your answer. The advantages it offers is a low-cost structure, relatively stable returns, high liquidity and reasonable safety. Debt mutual funds give you steady returns with low volatility and help you achieve your goals by helping you earn better returns in an efficient manner.
Debt funds are not entirely different from equity mutual fund schemes but when it comes to the safety of capital they do score higher than equity mutual funds. They are managed by professionals who take appropriate action to ensure the scheme is on the track where its investment objectives are concerned.
Debt funds and its categories
Debt funds broadly are categorised under short-term debt funds and long-term debt funds. Short-term debt fund investment span is around one to three years and is generally equated to bank Fixed Deposits of same tenures.
Short-term debt funds:
Liquid funds: As the name suggests the scheme is highly liquid with a guarantee on your capital’s safety and comes with a very short tenor. The focus of these schemes is on money market instruments.
Short-term plans: The scheme allocates a small portion to debt securities with a long maturity and earns interest as well as capital gains from short-term and long-term debt securities. The impact of interest rates falls more on the prices of debt securities with a longer-term than those with a shorter-term. So when there is a rise interest rate the allocation to longer-term debt security reduces and vice-versa.
Ultra short-term plans: The scheme invests in debt securities for a one year tenure, with an objective to generate a regular return or income on a low NAV or Net Asset Value.
Long-term debt funds:
Gilt funds: The scheme is highly liquid and has very low credit risk, due to which the coupon rate of government securities tend to be very low. Here the rate movement does not make a large impact on the prices.
Dynamic debt funds: In the scheme, the composition of the portfolio constantly changes depending on the interest rate changes and other market trends.
Income funds: They invest in both long-term and short-term securities issued by private corporations, government bodies, public undertaking etc. The scheme gets its liquidity from government securities and can generate high-interest income via corporate bonds.
Fixed Maturity Plans: The scheme is close-ended which invests in debt securities with tenure more, less or equal to the maturity period. Here the proceeds earned are given to the investor.Floating rate funds: The scheme mostly invests in debt securities and it benefits from a rise in the interest rates as and when the coupon rates of securities are revised.