Are you an investor with a low-risk appetite looking for good mutual funds to deposit? Then debt mutual funds are the investment option you are searching for.
In this post-pandemic recovering world, the equity market is volatile with many major indices down by almost 10%. In this condition, it is relatively safer to invest in fixed income funds/debt mutual funds.
If anyone is interested in investing in this investment option, one should know about its intricacies and its works. That knowledge can help to choose the right option and leverage its benefits.
A fixed-income fund or debt mutual fund is an investment option where an investor invests in various fixed income securities. It varies from government securities, treasury bills, to highly rated corporate bonds.
These instruments have a predetermined maturity date and fixed interest rates that the buyers can cash in. That is why they are given the name fixed-income fund. Its returns are not affected by the market fluctuations making it low-risk.
In simple words, it offers high liquidity with predictable returns. Every one of these debt instruments has a credit rating. It indicates the possibility of default by the debt issuer in payment of interest and principal.
Generally, these ratings and other factors are utilised by managers to select good quality debt instruments. But based on the status-quo, fund managers may select low-quality debt instruments.
These will give good returns and also are a calculated risk.
There are different types of debt funds classified on their maturity period. First are the liquid funds where investment is on the funds that mature by 91 days maximum.
Secondly, dynamic bond funds are the funds where the investment is made on instruments that have different maturity dates but have a prevailing interest rate.
The other fund on the list is corporate bond funds. These funds invest a minimum of 80% of their total assets in corporate bonds with the highest ratings.
These funds are good for lower risk-tolerant investors and for those who wish to invest in high-quality corporate bonds.
There are other similarly theme-oriented funds such as PSU funds and banking funds, etc. Other kinds of funds include credit risk funds, etc.
Before one selects its debt fund, one should assess its investment objective. After identifying the investment objective choosing the right fund becomes easier.
Another factor to be considered is the investment period. Every investment goal has a specific time limit. If one prefers the short-term ones that end within three months to a year, liquid funds are the right choice.
For the long-term funds that end within one to three years, short-term debt funds are the choice. For the intermediate time frame, then dynamic bond funds are the choice.
Debt mutual funds have their risk as they are exposed to interest rate risk.