Most people in India are familiar with equity mutual funds when it comes to investing. However, if you are looking for a safer investment option that offers consistent returns, debt funds might be an ideal choice. We will go over debt funds in this article, including their varieties, advantages, and ways to incorporate them into your investing plan.

What are Debt Funds?

Mutual funds that specialise in fixed-income assets, such as corporate bonds, government bonds, treasury bills, and other debt instruments, are known as debt funds. These funds aim to provide regular income to investors by earning interest on these fixed-income securities.

Debt funds are less risky compared to equity mutual funds as they don’t invest in stocks. Instead, they focus on securities that offer a fixed rate of return. That makes them popular for conservative investors who prefer stable returns with lower risk.

Types of Debt Funds in India

There are several varieties of debt funds, each meeting the needs and risk tolerances of distinct investor types. Let’s examine some of the primary debt fund options that are offered in India.

Liquid Funds

Liquid funds invest in short-term debt instruments. They are a great option for parking surplus money for a short period as they offer higher returns than a savings account, with the added benefit of high liquidity.

Ultra-Short Duration Funds

These funds make investments in debt instruments that mature in three to six months. They are slightly riskier than liquid funds but can provide better returns.

Short-Term Debt Funds

Short-term debt funds are invested in bonds with one to three years of maturity. These funds seek to offer low risk and consistent returns. For investors who wish to make short-term investments in mutual funds but would rather take on less risk than equities funds, they are a smart option.

Corporate Bond Funds

At least 80% of the assets held by corporate bond funds are high-rated corporate bonds. They are a good option for investors willing to take a slightly higher risk in exchange for potentially higher returns than government bonds.

Gilt Funds

Government securities, which are among the safest investments, are what gilt funds invest in. As the securities are backed by the government, these funds carry minimal credit risk. However, the interest rate changes may affect them.

Dynamic Bond Funds

Funds for dynamic bonds don’t have a set maturity date. The portfolio is actively adjusted by the fund manager in response to market conditions. This type of fund can perform well in rising and falling interest rate scenarios.

Benefits of Investing in Debt Funds

Investing in debt funds can offer several advantages, especially for conservative investors. Here are some key benefits:

• Stable Returns: These funds make investments in fixed-income assets that provide consistent returns.
• Lower Risk: Debt funds carry lower risk than equity mutual funds because they invest in fixed-interest securities.
• Liquidity: Most debt funds offer high liquidity, meaning you can easily withdraw your money when needed.
• Tax Benefits: Debt funds offer certain tax benefits, especially if you hold your investment for over three years.

Investing in Debt Funds

Investing in debt funds is simple and can be done in two ways: lump sum or through a Systematic Investment Plan (SIP). Here’s how you can get started:

Invest Via SIP

You can opt for an SIP if you prefer to invest small amounts regularly. With an SIP, you can invest a fixed amount in the debt fund every month. This method is ideal for salaried individuals or those who want to invest without spending a large sum. You can use a SIP calculator to estimate the future value of your investment based on the SIP amount and tenure.

Lump Sum Investment

You can use the lump sum method to invest in debt funds if you have a lot of extra money. This option may offer better returns if the interest rates are favourable. Still, it also carries the risk of timing the market incorrectly.

Things to Consider Before You Invest in Debt Funds

Before you decide to invest in debt funds, consider the following factors:

• Investment Horizon
• Risk Tolerance
• Expense Ratio
• Past Performance

Conclusion

Debt funds are a reliable and safer option for investors who prefer stability and lower risk. They can offer better returns than traditional fixed-income investments and are a good choice for diversifying your portfolio. Whether you invest via SIP or lump sum, using tools like a SIP calculator can help you plan your investment better. By understanding the different types of debt funds and their benefits, you can make informed decisions and grow your wealth steadily.