Did you know that as of March 31, 2024, there are around 73,98,968 folios (representing individual investor accounts in mutual funds) for open ended and close ended debt mutual funds?
This number depicts the growing popularity of debt funds in India. Undoubtedly, it is the best time to invest in debt mutual funds.
But what is a debt fund, and how can it be beneficial? Let’s find out.
Debt funds are a variety of mutual funds that primarily invest in fixed-income securities. These fixed-income securities can be government bonds, debt instruments, corporate bonds, etc. The main objective of the debt funds is to provide investors with steady returns. As they provide steady returns, they are relatively low-risk. In other words, investing in debt funds is an excellent idea compared to equity-based funds.
Debt funds are mutual fund schemes that are designed to yield returns by allocating investor capital across several fixed-income instruments. The allocation of investor capital is in accordance with the strategy outlined in the fund’s prospectus. Usually, the debt mutual funds generate returns by buying bonds and collecting interest payments. They vary based on the specific traits of each security.
The mechanism through which these funds generate returns can be compared to traditional saving products like bank deposits, where individuals lend money to financial institutions.
However, there is a slight difference that all investors must know. The key distinction is the diversification in debt funds. This provides investors with increased returns and liquidity compared to traditional fixed-income options. So, the debt mutual funds returns are always on the higher side. Undoubtedly, debt mutual funds are an effective way to start your investment journey and build a secure future.
Listed are the top debt mutual funds every investor should know:
|
Fund Name |
Average Yearly Return |
Risk Level |
SEBI Category |
|
Aditya Birla Sun Life Medium Term Plan Fund |
0.08 |
Moderate |
Medium Duration Fund |
|
UTI Medium to Long Duration Fund |
0.067 |
Moderate |
Medium to Long Duration Fund |
|
Nippon India Strategic Fund |
0.071 |
Moderately Higher |
Medium Duration Fund |
|
HDFC Regular Savings Fund |
0.048 |
Moderate |
Conservative Hybrid Fund |
|
Sundaram Low Duration Fund |
0.073 |
Low to Moderate |
Low Duration Fund |
|
ICICI Prudential Dynamic Bond Direct Plan Growth |
0.048 |
Moderate |
Dynamic Bond Fund |
Before investing in debt mutual funds, you must be aware of their common types. Listed are a few popular types of debt funds based on the maturity period:
Money Market Fund
It is a type of fund which invests in money market instruments with a maximum maturity of one year. These funds are suitable for investors who are seeking low-risk debt securities for the short term.
Liquid Fund
These debt funds invest in money market instruments with a maximum maturity period of 91 days. When compared to savings accounts, liquid funds provide better returns.
Dynamic Bond Fund
Dynamic Bond Funds adjust the maturity of their portfolio securities based on anticipated changes in interest rates. They extend maturity when rates are expected to fall and shorten it when rates are expected to rise, aiming to optimize returns amidst changing market conditions.
Banking and PSU Fund
This type of debt fund invests at least 80% of the total assets in the debt securities of PSUs and banks.
Credit Risk Fund
Credit Risk Funds primarily invest a minimum of 65% of their portfolio in corporate bonds, focusing on AA and below-rated bonds. These funds aim for higher returns by taking on credit risk associated with lower-rated corporate debt, potentially offering higher yields alongside increased risk of default.
Apart from the mentioned schemes like Dynamic Bond Funds and Credit Risk Funds, there are various other types of mutual fund schemes such as Equity Funds, Hybrid Funds, and Liquid Funds. You must know about them individually to understand their specific investment objectives and risk profiles.
Are debt mutual funds your financial safety net? Let’s find out.
Stability and Regular Income
Are you a risk-averse investor looking for steady debt mutual funds returns? Debt funds might be your answer! They offer more stable returns compared to equity funds, providing a reliable income stream.
Portfolio Diversification
Think of your investment portfolio as a balanced meal. Just as you need different food groups, your portfolio needs variety. How can debt funds help? They play a crucial role by balancing riskier investments and offering stability during market volatility.
Professional Management
Imagine having a financial expert working for you 24/7. That's what you get with debt funds! You will have access to expert decision-making. Moreover, you will receive expert market insights.
Flexibility
One size doesn't fit all in investments. Debt funds provide flexibility to investors. They double up as short-term funds for conservative investors. Moreover, they can also be in the form of long-term funds for those seeking higher returns.
Competitive Returns
Historically, debt funds have often outperformed traditional fixed-income options. Are you wondering how? The ability to capitalize on interest rate changes makes debt funds unique. Furthermore, they boast a diversified portfolio within the fund.
Debt mutual funds have many benefits, but it is important to know about their risks and limits. Unlike fixed deposits in banks, debt funds do not promise returns. Their performance can change because of many things, like changes in interest rates, the credit quality of the securities they are based on, and how the market is performing overall.
When interest rates increase, bond prices decrease. This can make the fund's NAV go down. But when interest rates go lower, bond prices get higher, which is good for the fund. Longer-duration funds are sensitive to the changes in the interest rates.
There is always a chance that the issuer of a bond owned by the fund might not pay interest or principal. Fund managers try hard to reduce this risk by diversifying and doing careful research, but they cannot get rid of it completely.
Debt mutual funds are vital for a well-rounded investment portfolio. They give stability and steady income and help diversify investments. These funds are a great option instead of usual fixed-income instruments like savings accounts or bonds because they might offer higher returns.
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