Debt mutual funds are those schemes that invest in fixed-income instruments like government bonds, corporate bonds, money market instruments, commercial papers, and other securities. These offer capital appreciation and regular interest incomes. Financial experts also call these bond funds and income funds.
While debt funds carry fewer risks when compared to equity funds, these funds also generate lower returns than equity mutual funds.
On the Bajaj Finserv platform, we have over 15 categories of debt funds depending on their maturity period. Invest in debt funds to get stable returns and diversify your investment portfolio.
The following sections of this blog will cover important details related to these funds.
Who should invest in a debt fund?
People with a low risk-taking capacity are the ideal investors of debt funds. These schemes suit the following investors:
- Short-term investors
People who have an investment horizon of 3 to 12 months can consider investing in debt funds. It is a much better option than keeping funds in a regular savings account. They can consider investing in liquid funds that offer returns of around from 6 to 7%, annually.
- Medium-term investors
People who have a medium-term investment horizon of 3 to 5 years can choose debt schemes. For such investors, dynamic bond funds are suitable as they generate higher returns than fixed deposits and short-term bond funds. If an individual wants monthly payouts, they can choose a monthly income plan.
How do debt funds work?
The fund manager of debt funds purchases listed or unlisted debt securities at a particular price. Then, he/she sells them later at a margin, which increases or decreases the fund’s value.
The underlying debt instruments in which the scheme invests also generate periodic interest. There are certain schemes, which earn more interest from fixed-income instruments during the fund's tenure. Interest income gets added to a debt scheme daily.
The Net Asset Value (NAV) of a debt scheme depends on the interest rates of underlying assets. It also depends on the upgradation or gradation of the credit ratings of a fund's holdings. Another factor affecting a debt fund's returns is interest rate movements.