A Beginners Guide For Debt Mutual Fund Investment In India

Owing to the prevalent volatile and undpredicatble market conditions, debt mutual funds are quickly gaining a lot of traction in the Indian markets. Investing in debt funds is very similar to lending money to your friends or family, and earning interest on them along with capital appreciation. Except in the case of debt mutual funds, an investor lends to a company. This article aims to serve as a mutual fund investment guide for all investors – old or new. Read on to learn more about debt mutual funds in India.

What is a debt mutual fund?

Also known as a fixed-income fund, a debt fund invests a significant portion of your money in fixed-income securities such as government securities,  debentures, bonds, etc. By investing money in such instruments, debt funds aid in lowering the risk aspect substantially for investors and help to accumulate wealth.

Types of debt mutual funds

Before you invest in debt funds, following are some of the types of debt mutual funds available to an investor:

Liquid Funds –These mutual funds invest in debt securities that have a maturity period of up to 91 days. These investment options are comparatively less risky than other debt mutual investments. These funds barely witness deleterious returns and could prove to be better alternatives to savings bank accounts as they offer similar liquidity with the potential to generate higher yields. As these funds are highly liquid, they can be used as emergency funds, as well.

Dynamic bond Funds – These funds, being proactive in nature, alter allocations between short-term and long-term bonds. This helps them make the most of the ever-changing interest rates. The objective is to deliver ‘optimal’ returns in any market scenario. Hence, these funds might be a viable choice for those who wish to play to the interest rate cycle.

Short term Funds – These loans have a tenure of a year or less. They are intended to improve the temporary shortfalls of a business or an individual. These loans are generally unsecured.

Ultrashort term Funds – These funds provide more liquidity and longer investment horizons as compared to other loans. These funds invest in securities that mature up to 91 days. They can be used in place of liquid funds by investors for both systematic transfer plans (STPs) and short-term investment needs.

Irrespective of the type of funds one chooses to invest their money, they should always choose their mutual fund investments based on their investment horizon, financial goals, and risk profile. If their goals need to be met within less than five years, they may consider investing in debt mutual fund schemes. If they want to invest in long-term goals of over five years, one might consider a hybrid or equity schemes. One may consider investing in riskier options like mid-cap and small-cap mutual fund schemes only if they have a longer investment horizon of 7-10 years. Happy investing!