Everyone wants to get some fixed income in the long run to have a secure life. Debt funds are one of the great ways to achieve this. This invests in fixed income and interests generating entities like government entities, corporate bonds, commercials, and other instruments.
The important reason to invest in debt funds is capital appreciation. The interest rate and the maturity period will be decided by the issuer or investor. The returns will be optimized by investing in various types of securities. The returns are predictable. Hence, they are suitable for short term and medium-term debt fund investments.
Short Term Debt Funds
When compared to keeping money in a bank savings account, liquid funds are more reliable and ideal for investing. The returns in offering liquid funds are higher along with similar liquidity requirements. Usually, this ranges from 3 months to 1 year.
Medium Term Debt Funds
Dynamic bond funds are ideal for medium-term investors. This ranges from three to five years. They offer high returns when compared to five year FD in banks.
Types Of Debt Funds
Dynamic Bond Funds
Based on the interest rate, the fund authority keeps changing the composition. The average maturity period of different instruments of investment is for both long and short maturities.
It is more stable than dynamic bond funds and the maturity of income is 5-6 years. They rely on interest rates with extended maturities.
Ultra Short Term Debt Funds
These are not affected by fluctuating interest rates. Hence, they are ideal for conservative investors. They have an investment in instruments with shorter maturities.
This investment on instruments is with a maturity period, not more than 91 days. Hence, they are almost risk-free. They are better than a savings account in the bank and also they provide higher returns.
These funds are invested in high rated securities like government securities with very low risk on credits. It’s very rare that the government defaults the loan and hence it is an ideal choice for risk-free and fixed income investors.
These funds are not invested according to the maturity of instruments. Returns are earned by calling on credit risks or by holding bonds with low rates with higher rates. They are considered to be risky when compared to others.
Fixed Maturity Funds
They are closed and ended debt funds that invest in fixed income securities like government securities and corporate bonds. The money will be locked-in for a fixed time which can be months or years. It’s like a tax-efficient fixed deposit that doesn’t guarantee higher returns.
Things To Be Considered As An Investor
- Risk – When compared to bank FDs, these funds have more risk with interest rates and credit risks. The manager might invest in credit securities which have a low rate which increases the chances of default.
- Return – They don’t offer guaranteed returns even though they have fixed income. Net asset value may fall with the increase in overall interest rates.
- Cost – The expense ratio is charged by the fund managers to manage your money. Long holding period will help in recovering the cost of expense ratio with the lower returns generated when compared to equity funds.
- Investment horizon – If your investment horizon is for 3 months to 1 year, you can opt for liquid funds. If you have 2-3 years then you can opt for short term plans whereas dynamic plans are appropriate with 3-5 years horizon.