Debt fund, a low-risk mutual fund, invests most of the money into fixed income instruments like corporate bonds, government bonds, bonds issued by banks, certificate of deposit, treasury bills etc.
Debt fund is a low-risk mutual fund in which most of the money is invested into fixed income instruments like corporate bonds, government bonds, bonds issued by banks, certificate of deposit, treasury bills etc.
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Investors with lower risk tolerance generally prefer investing in debt funds.
This is because debt funds are diversified across various securities and have pre-defined maturity dates. The returns are more or less expected, as per experts.
Unlike equity funds, they are not very much impacted by market fluctuations.
However, choosing a right fund plays a major role here.
A debt fund can be proven right or wrong depending on how well it met the financial goals, while also taking care of an individual’s risk appetite. According to Paisabazaar, one should access the investment horizon, risk appetite and interest rate trend before selecting any fund.
Besides, checking the credit quality, assets under management (AUM), expense ratio and average maturity are also the essential parameters.
The bonds are generally assigned a credit rating by various agencies based on their ability to pay the money back, while AUM is the total amount invested in a particular scheme by all investors.
According to DP Singh, Chief Business Officer, SBI Mutual Fund, short-term debt funds are great if one is looking to invest for a period of 6 months to 1 year.
"These can be used by investors who are looking to create an emergency fund. When the need is, they can be easily withdrawn," he explains.
These funds tend to be less volatile as compared to higher duration products.
"For an investment horizon of 6 months to 1-year, investors can invest in money market funds. For a period of 1 year to around 3 years, investors can consider funds such as the short-term debt funds and medium duration funds depending on the investment horizon," he further suggests.
Corporate bond funds can be looked at by investors who want to invest for more than 3 years. While selecting from these funds, investors should keep in mind the credit risk that these portfolio carry.
Disclaimer: CNBCTV18.com advises users to check with certified experts before taking any investment decisions.
First Published: IST