When discussing investments in the sharemarket, there are many terms that we hear but don’t know much about. Many people want to learn more about debt funds, a term that is often used in the market. Although there are many types of mutual funds available, debt funds offer a different income stream. There are also many formats. This article will help you to understand the terms, their types, the results they produce, and the benefits they can have for your portfolio.
What is Debt Funds?
A type of mutual fund that falls under the fixed income instrument category is called debt funds. This includes corporate and government bonds, money markets instruments, corporate debt securities, and other financial instruments that generate capital. Also known as Fixed Income or Bond funds.
People who want to generate a steady income without taking on too much risk are well-suited for debt funds. The volatility of debt funds is lower than equity, and they are therefore less risky.
Types Debt Funds We’ll be briefly listing some of these types in the next section.
Learn more about different types of debt funds here
- Liquid funds : This fund provides maximum liquidity for the investment. These funds have a maximum maturity of 91 days depending on the instrument they are invested in. Investors who have excess funds that can be used to invest in income-generating schemes will prefer this option.
- Short-term and ultra-short term debt funds: This fund is popular with younger investors or those who are new to investing. The maturity period for invested instruments ranges from 1 to 3 years.
- Credit Opportunities funds – This fund allows you to take risks and invest in lower rate instruments for higher returns. This can sometimes be risky.
- Dynamic bonds funds: These can change or switch between portfolios depending on market conditions to maximize investment profit. The market situation dictates that it dynamically switches between portfolios.
- Fixed maturity plan: These are very similar to fixed deposits in terms the features. The lock-in period for each scheme is different depending on which scheme you choose. You can choose the scheme that suits your needs and goals. During the initial offer period, a mandatory investment must be made. Later, however, there is no obligation to make an investment.
The main distinction between equity and debt funds is as follows
In simple terms,
- The company owns the debt holders, which are creditors. Equity is the owner of the investor.
- Equity is less risky than debt funds.
- Debt funds can have regular or fixed returns, while equity returns can be variable or irregular.
- As opposed to equity, debt funds are more binding than ownership.
- It is wise to know before you invest. This applies to both long-term and short-term investments.
