Debt mutual funds have been increasingly popular in the recent years. This is due to low risk associated with debt funds. Debt funds invest primarily in debt-based market securities, government bonds, corporate bonds, debentures, etc. Since they carry lower risk than an equity mutual fund, they are considered to be a good choice for the conservative investor.
One can invest in debt-based mutual funds either with a lump-sum amount or through a Systematic Investment Plan (SIP). For beginner investors, it is advisable that you start with an SIP, so as to instil investing discipline.
Different types of debt mutual funds:
Over the years, debt funds have evolved into something very broad. There are different types of debt mutual funds, each suitable for different needs and situations. Below are a few of them:
Liquid funds are by far the most popular type of debt funds. Liquid funds are highly liquid, and can be withdrawn overnight without any exit load. Such funds invest primarily in highly liquid securities, and fluctuate very little. Liquid funds are generally used by investors to park excess amounts of money for a short period of time. Liquid funds provide a decent return on investment, about 6-7% per annum. Though this may seem less than other debt funds, liquid funds actually have a lot of benefits such as liquidity, etc.
Ultra-short-term funds invest in debt funds based securities that typically mature in less than a year. Ultra-short-term funds are best suited for investors who want to park money for a few months to less than a year. They are secure and offer returns higher than a liquid fund. Most funds under this category come with zero exit loads.
Short Term Funds
Short term funds are best suited for investors who want to be invested only in the short term, i.e. between 1-3 years. Short term funds are considered to be a low risk investment, and are suited for conservative investors. These funds basically invest in debt based securities with a maturity period of 1-3 years. Such funds are suitable for those with a low to moderate risk appetite, and a short-term investment horizon. They usually carry an exit load of 0.5% if the investment is redeemed within six months.
Dynamic Bond Funds
Dynamic bond funds invest across all kinds of debt funds based securities and bonds. It invests in securities of varying maturities. Dynamic bond funds have an investment portfolio that is micro-managed by a fund manager who actively looks out to profit from interest rate movements in the short term. Dynamic bond funds are best suited to those investors who aren’t very sure about interest rate movements, but do want to reap benefits if there is positive movement. Returns from dynamic bond funds are more volatile, and hence comparatively riskier than other debt funds.
Income funds invest primarily in government bonds, corporate bonds, and other money market instruments, that have a maturity of more than 4.5 years. These funds are extremely vulnerable to changes in interest rates. Income funds are best suited for investors with a high-risk appetite, and a long-term investment horizon.
Credit Opportunities Fund
Credit opportunities funds made for investors who have medium risk appetite and want to invest for a medium to long term. Such funds primarily invest money in debentures, corporate bonds, etc. of differing maturities.
Fixed Maturity Plans
Fixed Maturity Plans or simply FMP are among the best debt funds based schemes for conservative investors. These are closed end funds that work just like fixed deposits. Fixed maturity plans generally invest in debt based market securities with fixed maturity. These are considered to be a low risk investment, and still provide decent returns to the investor.
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The Bottom Line:
Debt funds are considered to be an amazing start to investing money in financial markets. Many beginner investors who are afraid to venture into the financial markets should try debt funds at least once. It is essential that an investor is well-informed about the schemes they are looking to invest in. Contact our financial consultant at WealthApp to help you choose the top mutual funds based on your needs.
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