What are Debt Funds? | Definition & Benefits of Debt Mutual Funds (2024)

FAQs

What are Debt Funds? | Definition & Benefits of Debt Mutual Funds? ›

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.

A debt fund is a type of mutual fund schemethat primarily allocates its investments to fixed-income securities. These fixed-income instruments encompass a range of assets such as corporate and government bonds, money market instruments, treasury bills, and commercial papers, among others.

why invest in debt mutual funds? A few major advantages of investing in debt funds are low cost structure, stable returns, high liquidity and reasonablesafety. Debt funds also score on post-tax return. Dividends from debt funds are exempt from tax in the hands of investors.

Investing in debt funds carries various types of risk. These risks include Credit risk, Interest rate risk, Inflation risk, reinvestment risk etc. But the key risks which needs be considered before investing in Debt funds are Credit Risk and Interest Rate Risk; Credit Risk (Default Risk):

Among the various types of debt funds available in the market, one of the most popular has been the Monthly income plan or MIP. While MIPs as a debt product gives higher returns than traditional bank FDs, they are not an assured return product, as is normally perceived.

Unlike Equity Funds, Debt Funds are considered low risk and are ideal for conservative investors seeking stable returns. They offer liquidity, ease of investment and diversification across various debt instruments. However, Debt Funds are subject to interest rates and credit risk.

Flexi FDs offer the flexibility to withdraw funds without penalty. However, if you opt for regular FDs, you may have to pay the penalty for early withdrawal. Conversely, debt funds impose no exit loads after a certain period. Therefore, debt funds provide greater liquidity and can be more cost-effective than Bank FDs.

Debt Fund vs. Fixed Deposit: both offer stable returns but work quite differently. FDs provide guaranteed returns over a fixed period, while Debt Funds invest in bonds and money market instruments for potentially higher gains. However, Debt Funds carry more risk since the underlying assets can fluctuate in value.

How to get 10,000 monthly income? ›

The Pradhan Mantri Vaya Vandana Yojana (PMVVY)

The plan provides a fixed rate of return of 7.4% per year for ten consecutive years. One of the best options for risk-averse investors to get ₹10,000 per month as a pension is investing in the PMVVY scheme.

Debt Funds invest the money pooled from investors in bonds issued by banks, PSUs, PFIs (Public Financial Institutions), corporates and the Government.

Flexi FDs offer the flexibility to withdraw funds without penalty. However, if you opt for regular FDs, you may have to pay the penalty for early withdrawal. Conversely, debt funds impose no exit loads after a certain period. Therefore, debt funds provide greater liquidity and can be more cost-effective than Bank FDs.

How do debt funds work? Debt funds aim to generate returns for investors by investing their money in avenues like bonds and other fixed-income securities. This means that these funds buy the bonds and earn interest income on the money.

Generally, debt funds are considered safer than equity funds because they primarily invest in fixed-income securities with lower volatility. However, the level of safety depends on the credit quality and maturity of the underlying securities. When to invest in debt or equity?

Debt financing can be both good and bad. If a company can use debt to stimulate growth, it is a good option. However, the company must be sure that it can meet its obligations regarding payments to creditors. A company should use the cost of capital to decide what type of financing it should choose.