When Indians think of investing a majority of them think of putting their money in conservative instruments like banked fixed deposit, public provident fund, post office, or any such similar fixed income avenues. However, the Indian debt market has witnessed a drastic fall in interest rates which is why investors are now reconsidering their choice of investments. Most investors are now turning to mutual funds as an alternative and there isn’t a reason why they shouldn’t.
Mutual funds today are only of the most sought after market linked schemes. Investors prefer mutual funds over direct stock market investments because mutual funds offer diversification through a single investment. But a lot of investors refrain from investing their hard earned money in mutual funds because they believe that all mutual funds invest in the equity market. The truth remains that under the mutual fund gamut, there are multiple subcategories as well. Some of the most common categories of mutual funds are equity, debt, and hybrid. Investors who do not wish to invest in equity mutual funds simply because of the scheme’s volatile nature, such individuals may consider debt mutual funds.
Let us find out what debt mutual funds are and some of the things which investors must emphasize while choosing a debt scheme.
What is a debt fund?
A debt fund is an open ended mutual fund scheme whose main objective is to generate stable returns and protect the investor’s capital. Unlike equity funds that have a high risk returns trade-off, debt funds do not invest in equity markets and have a portfolio comprising of fixed income securities and debt related instruments. A debt fund’s portfolio usually comprises government and corporate bonds, commercial papers, debentures, CBLO, certificates of deposits, etc.
Things to know before investing in debt funds
Debt fund returns are not linked to equity markets
Debt mutual funds invest the majority of their portfolio in debt related instruments and fixed income securities depending on the nature of the scheme and its investment objective. They invest the majority of their investible corpus in debt securities like commercial papers, government back securities, debentures, etc. Since they have a minimum of almost zero exposure to the equity market, any upheavals in the equity market are less likely to create any impact on the performance of the debt fund portfolio.
Debt schemes have high flexibility
Debt funds are considered as diversification by a large number of equity heavy investors as these funds offer immense liquidity. Investors can redeem their debt fund units at any given time and the money is transferred to their registered savings account. Some debt funds like liquid funds even offer instant redemption options whereupon withdrawal, the money is transferred to their registered savings account within 24 hours. This is also the reason why investors use debt funds with a low maturity period for building an emergency fund.
Debt funds have SIP and lumpsum option
Retail investors can either make a one-time investment or opt for the Systematic Investment Plan while investing in debt funds. A lump sum investment can be considered by those who have surplus money sitting idle with them. On the other hand, investors can even start a SIP (Systematic Investment Plan), in any debt scheme of their choice. SIPs come in monthly, weekly, quarterly, biannually, and yearly forms. Investors can even use an online SIP calculator, to compute the total returns that their SIP investment might fetch. However, the SIP calculator can only display assumed returns as it does not consider other factors like expense ratio or exit load while computing returns.