Debt mutual funds are a popular investment option for investors looking for stable returns with lower risk than equity investments. Debt funds invest in a range of fixed income securities, including government bonds, corporate bonds, and money market instruments. In this article, we will explain how debt mutual funds work, and the different types of debt mutual funds available to investors.
How do debt mutual funds work?
Debt mutual funds pool money from investors and invest it in fixed-income securities. The income generated from these securities is then distributed to investors in the form of dividends or interest. Debt mutual funds are managed by professional fund managers who have expertise in selecting the right mix of securities to optimize returns and minimize risk.
The value of a debt mutual fund’s investment portfolio is reflected in its net asset value (NAV), which is the total value of the securities held by the fund divided by the number of outstanding units. The NAV of the fund changes on a daily basis based on the performance of the underlying securities in the fund’s portfolio.
Debt mutual funds can be classified based on the duration of the securities they invest in. For example, ultra-short-term funds invest in securities with a maturity of up to three months, while long-term debt funds invest in securities with a maturity of up to ten years. Depending on an investor’s investment horizon and risk appetite, they can choose a debt mutual fund that suits their investment needs.
Different types of debt mutual funds
- Liquid funds
These are debt funds that invest in highly liquid money market instruments with a maturity of up to 91 days. Liquid funds are suitable for investors looking for short-term investments with low risk.
- Ultra-short-term funds
These are debt funds that invest in securities with a maturity of up to six months. Ultra-short-term funds are suitable for investors looking for a slightly longer investment horizon than liquid funds.
- Short-term funds
These are debt funds that invest in securities with a maturity of up to three years. Short-term funds are suitable for investors looking for a moderate level of risk and a higher potential for returns than liquid and ultra-short-term funds.
- Medium-term funds
These are debt funds that invest in securities with a maturity of three to five years. Medium-term funds are suitable for investors looking for a higher potential for returns than short-term funds but with a slightly higher level of risk.
- Long-term funds
These are debt funds that invest in securities with a maturity of five to ten years. Long-term funds are suitable for investors looking for a higher potential for returns with a higher level of risk.
Debt mutual funds are a popular investment option for investors looking for stable returns with lower risk than equity investments. They offer a range of investment options, based on the duration of the securities they invest in, which allows investors to choose a fund that suits their investment horizon and risk appetite. By investing in a debt mutual fund, investors can benefit from the expertise of professional fund managers and the diversification offered by a portfolio of fixed income securities. However, it is important for investors to carefully evaluate their investment goals and risk appetite before investing in any mutual fund.