A debt fund is a type of mutual fund which predominantly invests in fixed-income securities such as government securities, corporate bonds, certificate of deposit and other money market instruments.
Who Should Invest in Debt Funds?
Debt funds are a suitable investment option for conservative investors who do not want to undertake much risk and are comfortable with earning returns which are although high but lower than equity funds. Debt funds are suitable for all investment horizons, be it as short as 1 day, 1-3 months or as long as 15 years.
How Do Debt Funds Generate Returns?
Debt funds generate returns in the following 2 ways:
- Interest Income: The fixed income securities/bonds which they hold feature a predetermined interest rate termed as the coupon rate and provide them with an interest amount at periodic intervals.
- Portfolio Valuation Change: Debt funds generate returns by change in value of their individual holdings. The value of their bonds and other fixed income holdings changes due to economy-wide interest rate and credit rating movements.