A Beginner’s Guide to Debt Mutual Funds

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Mutual funds are one of the most prominent investment options out there and are increasing in popularity even more. So in today’s article, we will talk about Mutual funds, and mainly Debt mutual funds.
What are Mutual Funds ?
A Mutual Fund is a professionally managed fund, where money is pooled from several investors to invest in Securities. Mutual funds are usually distinguished based on their principal investment. Such as Money market funds, bonds or fixed-income funds, and equity funds. They may have a combination of some of them, which is known as a hybrid fund. Also, you get a wide variety of options while investing in mutual funds as there are Mutual funds based on an index known as an index fund, you also find mutual funds that are based on a certain sector. The person who manages the Mutual fund is known as the fund manager. The average return on mutual funds falls somewhere between 8-12%. But some may go as high as 30-35% if you’re lucky enough. The main advantages of the mutual fund include low risk, professional management, and diversification. A mutual fund is increasingly becoming a favored choice of investors as it doesn’t require much time to research, you just have to find a good fund and you start with as low as ₹100 with SIP.
What are Debt Mutual Funds?
A Debt fund or bond fund is also a type of mutual fund. This fund invests in debt securities such as bonds, treasury bills, etc. Debt funds provide you with regular dividends, that is interest payments from underlying securities also one receives periodic realized capital appreciation. Debt funds provide a source of regular income and also sometimes the dividend is paid more frequently, even higher as compared to buying individual bonds.
What are types of Mutual Funds?
There are different types of debt mutual funds the list of which is given below:
  • Overnight funds – Overnight funds invest in debt securities with a maturity of just a day. They are extremely safe and for those who want to park their money for a while then this is a great option.

  • Liquid funds – Liquid funds invest money in debt securities which have a maturity of 91 days. As the risk is low the yield is also low. Ex- treasury bills and commercial papers.

  • Ultrashort duration fund – These have a Macaulay duration of 3-6 months and yield higher returns as compared to fixed deposits.

  • Low duration funds – These types of funds invest in Securities with a Macaulay duration of 6 and 12 months. Due to their longer duration, these are considered a bit risky as compared to ultrashort duration funds.

  • Money market funds – These funds invest in Securities which have a maturity period of a year. Ex- treasury bills and commercial papers.

  • Short duration funds – These debt funds invest in debt securities with a Macaulay duration of 1-3 years.

  • Medium duration fund – Medium duration fund schemes invest in debt securities with a Macaulay duration of 3- 4 years.

  • Medium to long-duration funds – These debt schemes invest in debt securities with a Macaulay of 4-7 years.

  • Long duration funds – Long duration funds invest in debt securities with a Macaulay duration of more than 7 years. This usually carries a high risk as the tenure is long.

  • Dynamic bond funds – Under dynamic bond funds, the fund manager invests in debt securities across different duration. Fund managers invest According to the interest rate. Often the fund rebalances its investment with a change in the interest cycle.

  • Corporate bond funds – While all the above-given funds were invested based on duration, corporate bond funds invest based on the credit rating of the securities. These usually invest 80% in high-rated debt securities.

  • Credit risk funds – These funds, similar to corporate bond funds, invest based on rating. Almost 65% is invested in high-rated bonds, and the other is invested in lower-rating securities which usually provide higher returns.

  • Banking and PSU funds – These kinds of funds invest 80% of their money in debt securities issued by banks and Public sector companies.

  • Gilt funds – These are debt schemes that invest 80% of their money in government debt securities of various durations.

  • Gilt Funds With 10 Year Constant Duration – These debt funds invest at least 80% of their money in government debt securities having a constant Duration of 10 years.

  • Floater Funds – These funds invest at least 65% of fund money in floating-rate instruments.
  • Credit rating and safety level in Debt mutual funds –
    While investing in any Debt mutual fund one needs to understand the credit rating and related safety to understand the risk that you would be bearing by investing in that debt mutual fund. Also usually higher the safety, the lower the yield, and the lower the safety higher the yield so one needs to make sure that they research properly and then invest their hard-earned money.
    Conclusion – We have this article explained in detail about debt mutual funds and all the things related to debt mutual funds one needs to know. Hope the article helped you, and make sure that you research properly and then invest.

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