What are Debt funds?
Debt funds invest in securities which generate fixed income like treasury bills, corporate bonds, commercial papers, government securities, and many more money market instruments.
All these instruments have a pre-decided maturity date and interest rate that the buyer can earn on maturity- hence the name 'fixed income securities'. The returns are usually not affected by fluctuations in the market. Therefore, debt securities are considered to be low-risk investment options.
How do debt funds work?
Every debt security has a credit rating which allows investors to understand the possibility of default by the debt issuer in disbursing the principal and interest. Debt fund managers use these ratings to select high-quality debt instruments. A higher rating implies that the issuer is less likely to default.
Who should invest?
Debt funds are highly recommended for investors with lower risk tolerance. Debt funds usually diversify across various securities to ensure stable returns. While there are no guarantees, the returns are usually in an expected range. Hence, low risk investors find them ideal.
*Short term investors (3-12 months)- Rather than keeping your funds in a regular savings account, you can invest in liquid funds which offer good returns without compromising on liquidity.
*Medium term investors (3-5 years)- If you want to invest in a low risk instrument for 3-5 years, the first thing that probably comes to mind is a bank FD.
Investing in a dynamic bond fund for a similar tenure tend to offer better returns than FDs. Also, if you need monthly payouts (like interest) you can opt for a Monthly Income Plan.
Invest according to your investment plan-
Debt funds are available for all duration- from 1 day (overnight funds) to 7+ years (long duration funds). Therefore, you must choose as per your financial goals and investment horizon. Many investors turn towards debt funds for regular income.
Some savvy investors dedicate a portion of their investment portfolio to debt for adding stability. Whatever be the reason, ensure that you invest according to your requirements.