What are the debt Funds? Here we will talk about this instrument that can give you a fixed return. We all want to raise our money.
And we know that if we want to grow our money then we have to invest our money. So mutual funds can be a good option for you.
But many do not want to take the risk of mutual funds or equity mutual funds.
In this case, a Debt fund can be a good option for those who want to earn an average return with very low risk or no risk.
So in this article, we will clear all your doubts on What is debt fund and how it works?.
And if you read this article carefully we can guarantee you that you can decide on your own that you should invest here or not.
The meaning of Debt Fund-
To know What are the debt Funds? understand about debt first. I think we all know about debt.
Companies, financial institutions, and the government sometimes need money for a project or to run their expenses.
At that time some mutual funds give loans to these organizations.
Those are called Debt Funds. Debt means loan.
Purpose of Debt funds—
When we are investing our money, of course, we have a purpose.
If we want to beat inflation we have to invest in those instruments where we can easily get a decent return or a good return.
By good returns, we are talking about 8-15 percent return. One can get much more than this. But this is an average.
Everyone may not like debt funds, just because the debt funds can give an average return of 7-8 percent.
But it can be a great option for those investors who want to get a decent return with very low risk.
- If you want an emergency purpose fund then it can be a very good option. Because in case of emergency you can not take a risk on your money.
- If you have a short-term plan then also you can choose it.
- It can be a good option than Fixed Deposit. As well as it will give you exposure in the Mutual Fund. Also, it can give you a fixed income.
Here the Debt fund also has a unique use. Let’s assume that you have been investing in equity funds for a long time. And you have met your goal before your expected time.
Now you don’t want to take any risk on that fund then you can invest the whole amount into the debt funds.
Because there you will get an average return ( Which in most cases is higher than FD ) along with security.
You can say that this is a unique use of debt funds.
How to select A good Debt Fund–
- As for me, all those debt funds are good who invest money in good instruments. The best instruments here are those that have a good rating.
Also if the fund is investing the money in a good financial institution or a government project, it can be good.
Because you have to remember that the amount of money you are investing in a debt fund is the money where you do not want to take any risk on.
So you have to check what is the rating of those to whom the debt fund is giving loans. It will give you a little more confidence.
- After the rating, you have to check the past performance of that debt fund and as well as the past performance of the fund manager.
This you have to check every time whenever you go to buy any mutual fund.
Although past performance never guarantees the future, we can get an idea from here. You can check how long the fund manager is managing the fund.
- Along with this, you should check AUM ( Asset Under Management ). It means the size of the debt fund in simple language. It is better to be big.
Risk in Debt funds–
- Although it has a very very low risk, you can’t ignore the Credit Risk.
- The financial institutions or the company that is taking the loan but can’t repay the loan then you may be at loss.
That is why you should invest money in debt funds that are giving loans to good companies or institutions.
- One more risk you should know and that is liquidity risk. This is very rare but you need to know about this.
- You can also face Interest Rate Risk. It is the effect of changing interest rates on the value of the scheme’s securities.
This is when there is a crash in the market and everyone goes to redeem their money together.
There is no more such huge risk in this. If you invest all your money in an equity fund then it is much less than that risk.
Should you invest in Debt Funds?–
Yes, you should. If you are investing all your money in equity funds then somewhere you are doing mistakes.
Because debt funds should be a part of your portfolio. It will give you a fixed income. As well as it will give you much more securities than an equity fund.
I think after PPF and SSS ( Sukanya Samriddhi Scheme ) it is the best-fixed income option.
If you can take more risk then you can invest more money in equity funds and less money in debt funds.
If you don’t want to take more risks then you can do the exact opposite thing.
Types of Debt Funds–
You may have heard of liquid funds, short-term, medium-term, long-term funds. These all are the type of debt funds. It will depend on you that how long will you invest?.
If you want to invest for 1 to 90 days you can go with liquid funds or money market funds.
If f you have 3 to 6 months you can go with Ultra short-term funds.
If you want to invest for 6 months to 1 year then you can choose Short-term funds.
As well as you for 1 year to 3 years, you can go with Medium Funds and after that, you can choose Long-term debt funds.
Also, we can classify debt funds as per where the money is invested. Like Gilt Funds. It invests about 80 percent in government securities.
There are also some Dynamic Funds available in the market that change the investment according to the return.
Many of you may have heard of the Franklin debt fund. It also came under liquidity risk. That is why the debt fund has been closed.
There is no increase in subscription and redemption. And yet it remains so. These funds are called credit risk funds.
Here the company informs and then invests in any risk place to gain more return.
The investors are very happy to invest at first.
But whenever there is a crash in the market everyone wants to get their money out together and this is the reason why the debt funds face this kind of problem.
There are also many more types like- Banking and PSU funds, Corporate Bond Funds, Floater Fund, Overnight Fund.
- CORPORATE BOND FUND–
It invests a minimum of 80 percent in corporate bonds. It is better for those investors who have lower risk tolerance.
- OVERNIGHT FUND–
It invests in Debt securities. It has a maturity of 1 day. Just because it has very very low credit risk and interest rate risk these funds are considered to be extremely safe.
My opinion on Debt Funds-
As per me, it is a very good fixed income option. But you need to follow rule number one of Mr. Warren Buffett. And that is-
- Never lose your Capital. Many people lose their capital to get an extra return of 2 to 5 percent.
- But it is better not to get that extra 2 to 5 percent when there is a chance that you can lose your capital.
So invest smartly. This can be a better option for you than FD.
Which are the best debt funds?
As we discussed before you need to check where the fund is investing the money. You need to check their’s rating. You have to check the AUM also.
Are debt funds tax-free?
Long-term capital gain ( up to 1 lac ) is tax-free. Short-term capital gains ( redeemed before three years ) in debt funds are taxed as per the applicable tax rate.
Are debt funds better than FD?
As per interest rate, debt funds can be better. Because now there are very few banks that give 7 to 8 percent returns on FD.
As well as if you invest for more than 3 years in Debt funds it can be tax-free.
Is it good to invest in a short-term debt fund?
No. wherever you are investing your money try to invest for the long term.
Are debt funds safe as FD?
The banks provide more securities on the FD. But the debt funds also have very very low risk. That is why it is called Fixed income securities.
If you have any other questions on this topic then please comment below.