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What is a Debt Fund?

We all know how important investing in mutual funds is for creating wealth. To be successful in investments long-term, choosing the right investment is crucial. Debt funds are a type of mutual fund designed to minimize risk and provide stable, steady returns over time. Fund managers invest money into fixed-income instruments such as government bonds, securities, treasury bills, and more.

How Does a Debt Fund Work?

• When you invest in a debt mutual fund, the fund manager invests your money in fixed-income instruments.

• The returns are similar to those on bank fixed deposits (FDs).

• Returns received are credited daily to your investment account.

• The Net Asset Value (NAV) of the debt fund increases daily based on interest rate movements.

Types of Debt Funds

• Overnight Bond Fund: Invested for one day; very low risk and returns.

• Liquid Bond Funds: Investments for less than 91 days in debt and money market instruments such as government bonds and commercial paper; exiting before 7 days incurs a higher exit load as per SEBI rules.

• Corporate Bond Funds: Invest at least 80% in highly rated corporate bonds (CRISIL, AAA ratings) as mandated by SEBI.

• Credit Risk Fund: At least 65% invested in instruments rated below high-quality standards, accepting higher credit risk.

• Dynamic Bond Fund: Fund manager actively changes investments based on interest rate changes.

• Short Duration Bond Fund: Invests mostly in government bonds with 4 to 7 years maturity.

• Longer Duration Bond Fund: Invests in government securities for over 7 years maturity.

• Gilt Fund: Fully invested in government securities.

Risks in Debt Mutual Funds

• Interest Rate Risk: When interest rates rise, bond values fall, reducing returns.

• Credit Risk: Borrower default risks affecting the investment chain.

• Liquidity Risk: Difficulty in selling bonds due to market illiquidity.

• Reinvestment Risk: Reinvesting proceeds at lower interest rates reduces returns.

• Inflation Risk: Inflation exceeding bond yields reduces real returns.

Conclusion

Debt funds offer a safer investment option with stable returns, but interest rate fluctuations and other risks should be considered carefully. Choosing the right debt fund can help investors protect their capital and earn consistent income.

FAQ

• What is a debt mutual fund in India?
  A mutual fund investing in fixed-income instruments such as government bonds, treasury bills, and money market securities.

• What is the difference between debt mutual funds and equity funds?
  Debt funds aim for low-risk steady wealth creation, while equity funds target faster growth with higher risk.

• Why invest in debt mutual funds?
  They provide low volatility and steady returns, making them a comparatively safer option.

• How is the risk of debt mutual funds determined?
  By the credit quality of the underlying securities and interest rate changes.

• How to invest in debt mutual funds in India?
  Use apps like Finshak to select funds based on your financial capacity and risk profile and start investing.

You can download the Finshak app here:
https://play.google.com/store/apps/details?id=com.finshakapp.app&pli=1