Open-ended mutual fund schemes that predominantly invest in fixed-income debt securities are known as debt funds. The underlying assets comprises treasury bills, government bonds, certificate of deposits, debentures, corporate bonds and various other money-market instruments.
Debt funds are one of the safest investment instruments available to investors, who wish to earn optimal returns on their investment, without betting on risky avenues. Also, the returns are quite stable, as opposed to returns from equity funds which are highly volatile.
Benefits of Investing in Debt Mutual Funds
As debt funds primarily invest in securities that yield fixed-interest, returns from them are guaranteed. However, there is a minuscule possibility of a debt fund not performing upto the mark, this happens when the invested securities have low credit rating, or the interest rate movement is negative.
Overnight Funds or Liquid Funds are categorised under debt funds which have delivered optimal returns in the short run over the years. These funds are highly liquid and are a perfect safe haven for idle money in hand. One can redeem the units as per his/her convenience.
When compared to returns delivered by traditional savings methods such as Savings Accounts or Bank Fixed Deposits, debt funds have always fared well. While savings accounts have delivered around 4-5% annual returns over the years, liquid funds have delivered returns at the average rate of 7%. Also, instant redemption facility in case of liquid funds make them a better alternative to savings accounts.
When it comes to investing, it is recommended to construct your investment portfolio as diverse as possible. A diversified portfolio is the first step to effective risk mitigation. It is recommended to invest in that debt fund which has appropriate allocation to various money market instruments, instead of concentrating on single debt security.
Instead of individually selecting a debt security for investment, it is advisable to invest in a debt fund, where a professional fund manager formulates a portfolio of multiple securities, after proper analysis of market sentiment and interest rate movements.
