Banking terminologies can be daunting. Especially when misunderstanding them would lead to monetary implications. Understanding these terms would not only help you take astute and well-informed decisions about your money, but they also help you predict the outcomes of your decisions to a considerable amount of accuracy.
One of the most common queries people usually happen to inquire about is, “what is a debt mutual fund”?
Mutual funds, as some would know, are of many different types. People invest in different securities, depending on the investment strategies they have in mind. Thus, coming to debt mutual funds, they invest in a mix of debt or fixed income securities like Government securities, corporate bonds, money market instruments, treasury bills and other such securities. These securities differ in terms of time horizons. As a general rule of thumb, debt securities have a fixed maturity date and pay a fixed rate of interest.
The returns one gets on debt mutual funds comprises of the following:
- Interest income
- Capital appreciation / depreciation in the value of certain security considering the dynamicity of the market
These debt securities are assigned a “credit rating”. Credit ratings assess the ability of the issuer of the securities or the bonds to pay back their debt over the decided span of time. However, these ratings are authorised by independent rating organisations like CARE, CRISIL, FITCH, Brickwork and even ICRA.
Ratings are what help one evaluate the creditworthiness of issuers of fixed income securities. Therefore, Fund houses use these evaluations.
Considering the vastness of the features they allow, there is a wide range of debt mutual funds that are available to the needs of the different investors. This range is based on:
- Investment horizon
- Ability to bear the risk
We have enlisted some of the best debt funds here:
- Liquid funds
These funds, as the name suggests, invest highly in liquid money market instruments and provide easy liquidity. When you consider a period of investment, it could be as short as just a day for liquid funds.
- Floating rate funds
Floating funds primarily invest in floating rate debt securities. Moreover, this is where the interest paid changes with the changing interest rate scenarios in the debt markets. Investing in these funds is a suitable venture when the interest rates in the market are increasing.
- Ultra-short-term funds
Once known as Liquid Plus funds, ultra-short-term funds invest in very short-term debt securities with a small portion in longer-term debt securities. Most ultra-short-term funds do not invest in securities that extend a residual maturity span of more than a year. These funds are also sometimes called as Cash management funds or treasury management funds.
- Corporate bond funds
These funds predominantly invest in corporate bonds and debentures of ranging maturities which offer relatively higher interest. Consequently, they are also exposed to a higher volatility and credit risk.
Knowing some of the best debt funds, some would inquire about the benefits of debt mutual funds. Here they are:
- Investments remain unaffected by equity market volatility
- Adds stability to your investment portfolio
- Allows you the freedom to withdraw at your own will
- You aim for better post-tax returns.
With this post, you would have got a fair idea about the working of debt funds and its benefits. This will help you make a sound investment decision.