Debt funds are the ideal investment option for those who want higher returns but at a lower risk. These funds are generally mutual funds having low volatility. Debt funds invest in fixed-interest generating securities. These can be corporate bonds, treasury bills, government securities, commercial paper, etc. There are several types of debt funds which are discussed below.
- Liquid funds do not give negative returns. Hence, these are risk-free debt funds.
- Liquid funds have a maturity of 91 days or less.
- It gives a higher return than a bank savings account. Moreover, it provides better liquidity. The reason is that most companies offer instant redemption of liquid funds.
Short term fund
- The maturity of short term funds ranges from 1 year to 3 years.
- It provides steady returns. Moreover, these funds are a low-risk investment as they remain unaffected by interest rate movements. However, it provides lower liquidity than liquid funds.
Ultra short term fund
- These funds are similar to short term funds.
- The only difference is that the investment period is shorter. The maturity period for ultra short term funds is 3 months to 6 months.
- It provides a lower return than the other debt funds. However, these funds are less risky.
- These are ideal for risk-averse investors.
- The gilt fund invests only in Government bonds and securities.
- It can be considered as one of the safest investment options.
- There is low credit risk in such funds.
Corporate bond fund
- It invests only in bonds issued by corporate companies.
- Corporate bonds are ideal for long term investment.
- It is relatively a safe option for investment for 1 year to 4 years.
Credit risk fund
- These debt funds invest in bonds with lower ratings. It means that the credit risk fund investment is risky.
- There is a chance of default. However, it can deliver a higher return in case of long term investment.
- As the name suggests, the overnight funds mature in 1 day.
- It generally invests in CBLOs, overnight reverse Repos, overnight securities, etc.
- It is a safe investment option. However, it usually delivers low returns than other debt funds.
The debt funds are a low-cost investment option that can help you fulfill your financial goals. It can help you to generate wealth in the long run. Debt funds involve a lower risk than equity funds. But you should always consider the pros and cons before investing.