Mutual fund schemes are not a monolith. Some examples of the different mutual fund variants available in India are equity-oriented schemes, debt funds, and hybrid mutual funds (that invest in both equity and debt asset classes). Of these, debt funds are the funds that appeal to the sensibilities of risk-averse investors.
What are debt funds?
Debt funds are known for allocating funds to securities known for generating fixed income. Corporate bonds, commercial papers, treasury bills, government securities, and numerous other money market instruments are examples of securities generating fixed income.
These securities come with a pre-decided maturity date and interest rate. Therefore, they have the name fixed-income securities. Market movements do not affect the returns generated on debt fund investments. Hence, debt securities are regarded as low-risk investment options.
How do they work?
Debt securities come with a credit rating that will help you understand the possibility of default by the debt issuer. Fund managers managing debt mutual fund portfolios use these credit ratings to select high-quality debt instruments. Higher credit ratings mean that the debt issuers are less likely to default.
Who can invest in these funds?
Risk-averse investors find a debt mutual fund suitable. Apart from investors with a low-risk appetite, these funds are also suitable for short-term investors, i.e. an investment horizon between 3-12 months and medium-term investors i.e. investment horizons ranging between 3-5 years.
Why invest in debt funds?
Here are a few reasons that debt funds are top mutual funds for risk-averse investors:
- Safer investment option:
A Debt mutual fund investment is suitable for conservative investors seeking safer investment options. As stated before, the returns generated through debt funds are not impacted by market movements and, therefore they are a safer investment option.
- Provides stable income:
In comparison to conventional investment options such as fixed deposits or saving accounts, debt mutual funds are known for offering a higher possibility of stable income. That’s because these funds are known for generating returns through fixed-income securities.
- They are liquid:
Debt funds are easy to liquidate. Meaning you can redeem your investments at any time you want. This is unlike other fixed-income investment avenues like FDs, which usually come with lock-in periods and penalties for withdrawals before maturity. Debt funds have no such lock-in and, hence are highly liquid.
- Ideal for short-term goals:
Debt funds generally offer higher interest rates than bank deposits. Therefore, they can help you fulfil short-term goals. Also, you can invest a portion of your money in debt funds to build an emergency fund.
- They are flexible:
You can invest in debt mutual funds through the lump sum or SIP (systematic investment plan) mode. Apart from the two investment options, you also have the option of transferring units from one fund to another with the help of STPs, i.e., systematic transfer plans.
Debt funds can serve as a cushion against market volatility and, therefore are suitable for investors with a low-risk appetite and first-time investors. Furthermore, due to the easy redeeming process, you can redeem them during crises. Click here to invest in best debt funds.