What are Debt Mutual Funds?
Debt Mutual Funds
Debt funds invest mostly in debt and fixed income instruments such as treasury bills, government bonds, certificates of deposit, and other high-rated securities. If a mutual fund invests at least 65% of its portfolio in debt securities it is considered a debt fund. These funds are ideal for risk-averse investors as the performance of debt funds is not dependent on market fluctuations. Therefore, the returns provided by debt funds are predictable. The debt funds are again classified as below:
- Dynamic Bond Funds
Dynamic Bond Funds are those debt funds in which the fund manager modifies the portfolio according to the fluctuations in the interest rates.
- Income Funds
Income Funds invest in securities that come with a long maturity period and therefore, provide stable returns. Five years is the average maturity period of these funds.
- Short-Term and Ultra Short-Term Debt Mutual Funds
Short-term and ultra short-term debt funds are those debt funds that invest in securities that mature in one to three years. These funds are ideal for risk-averse investors.
- Liquid Funds
Liquid funds are debt funds that invest in assets and securities that mature within ninety-one days. Liquid funds are a great option to park surplus funds, and they offer higher returns than a regular savings account.
- Gilt Funds
Gilt Funds are debt funds that invest in high-rated government securities. It is for this reason that these funds carry extremely low risk and are apt for risk-averse investors.
- Credit Opportunities Funds
Credit Opportunities Funds mostly invest in low rated securities that have the potential to provide higher returns. It is for this reason that these funds are the riskiest class of Debt Mutual Funds.
- Fixed Maturity Plans
Fixed maturity plans (FMPs) are close-ended debt funds that invest in fixed income securities such as government bonds. One can invest in FMPs only during the fund offer period, and the investment will be locked-in for a specified period.