What are debt funds and who can invest in them?

 While equity mutual funds invest in public listed companies, debt funds invest in fixed-income securities of government and companies. These include corporate bonds, government securities, treasury bills, money market instruments and various other types of debt securities. Like a stock, investing in a company's equity is like buying a stake for the growth of that company. But when you buy debt fund, you give loan to the issuing entity. Government and private companies issue bills and bonds to get loans to run their various programs.

The interest you receive from these debt securities is determined in advance and its maturity period. Therefore they are called 'fix income' security because in this you know what you are going to get. Like equity funds, debt funds also raise good profits by investing in different securities. Debt funds offer good returns, but there is no guarantee of returns. Nevertheless, returns in debt funds can be estimated, which makes them safe for the conservative or small investor.

 

Various Securities in which debt funds invest

Debt funds invest in different securities with different credit ratings. The security's credit rating determines the risk of the entity issuing it.

A higher credit rating means that there is a better chance of interest payments and principal payments by that institution on maturity. Hence debt funds that invest in high-rated securities are less volatile than low-rated securities.

Apart from this, the other aspect is that the maturity period of the security in which the debt fund is being invested. Different debt funds invest in securities of different tenures. The shorter the time of maturity, the lower the probability of loss.

 

Types of Debt Mutual Funds

Debt mutual funds are of different types, just like equity mutual funds. The biggest difference between debt funds is the time of maturity.

 

Dynamic Bond Funds

These 'dynamic' funds, as the name itself suggests, mean that they keep changing their portfolio according to the changing interest rate. The timing of maturity of dynamic bond funds varies as they keep investing more or less over time depending on the interest rate.

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