What are debt funds? Its types

What is debt fund?

A debt fund is a type of mutual fund, which invests in ‘fixed income’ securities such as Govt. securities, Treasury bills, money market instruments, corporate bonds, and other debt securities of the varying maturities. Debt securities pay a fixed interest rate and come with a maturity date.

Debt funds offer a decent return on the investment with minimal risk. The returns comprised of interest income and capital appreciation (or depreciation) in the value of the security due to changing market dynamics. Debt securities are assigned a ‘credit rating’, which shows the issuer’s ability to pay back the debt over the period.

Now that you know what is debt fund, you should be familiar with the different types of the same.

Types of Debt Funds

Debt funds are of various types, depending on the investment needs of the investor. Here is a list of the most common types of debt funds-

• Gilt Funds

Gilt Funds invest in all long-term and short-term Govt. securities, issued by the central/state governments. There are no risks of default in case of Guilt Funds since the government issues these. However, due to a change in the rate of interest and other economic factors, the Net Asset Value of the scheme fluctuates.

• Ultra Short-term Funds

Ultra short-term funds invest in debt securities for a very short span of time. Only a small portion of the investment is made in long-term debt securities. The maturity for Ultra Short-term Funds is less than a year, usually 3-6 months. This type of debt fund is most suitable for investors who can afford to take risks with the aim of earning good returns in a short period of time. One good thing about Ultra Short-term Funds is that they are not affected by the changes in interest rate, so the returns are consistent.

• Fixed Income Funds

Fixed Income Funds invest in Govt. bonds, corporate bonds, and money-market instruments. They are extremely vulnerable to interest rate changes and so are appropriate for investors who opt for long-term maturity and have a high-risk appetite. One must time the entry and exit from Fixed Income Funds appropriately. Ideally, one should invest in these funds when the interest rates are at its highest.

• Fixed Maturity Funds

Fixed Maturity Funds (Plans) are a type of close-ended debt fund. The securities are retrieved before or on maturity, and the investor is paid the proceeds. Fixed Maturity Funds are great investment options for conservative investors since there are no interest rate related risks associated with them. However, you must ensure that you stay invested until the maturity of the scheme.

• Liquid Funds

Liquid Funds invest in liquid money market instruments such as commercial papers, treasury bills, and certificate of deposits with a maturity not exceeding 91 days. This makes this type of an investment almost risk-free. There are very fewer risks associated with such investment schemes, so Liquid Funds are considered good alternatives to savings accounts. They offer higher returns and similar liquidity.

Before you invest in debt funds, you should be well aware of the different types. This article summarizes the basics of what is debt mutual fund. Invest in the scheme that best suits your requirement and appetite.