Your simple Guide to Investing in Debt Mutual Funds - Financing Panda: Latest News on Finance, Loan, Business


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Monday, May 7, 2018

Your simple Guide to Investing in Debt Mutual Funds

Mutual Funds provide investors with a way to invest in stocks and bonds indirectly. The investor’s money is collected towards a common investment pool. This is used to invest in various types of equity or debt instruments, across different sectors.

While equity investments can provide the best opportunity for huge growth, they also come with a high risk factor, because the share market is highly volatile. This kind of investment might not be suitable for the average risk averse investor.

Debt instruments on the other hand involve less risk, but they also provide smaller returns when compared to the equity option. Still, these are safer and can offer the conservative investor a good way to invest in Mutual Fund, without needing expert knowledge on the matter.

Types of Debt Funds

Debt funds differ based on the goals, tenure of investments, and the type of debt instruments they invest in:

Liquid Funds

These are very short term debt funds, you can invest in them for periods ranging from one day to a few months, ideally three months or less. These funds invest mainly in money market instruments with maturity periods that match the debt fund’s tenure. They have a better chance of providing good returns than FDs, and because of the short maturity period, risk involved is also less.

Ultra Short-Term Debt Funds

These funds, also referred to as Liquid Plus Funds, invest in short-term securities, and may combine this with a few long-term investments. The term may be between 3 to 9 months and they may provide slightly better returns when compared to liquid funds.

Short-Term Debt Mutual Funds

These debt funds typically invest in debt securities with a maturity period of up to 3 years. The securities invested in could include commercial papers, bonds with a maturity period of between 3 to 6 months, and certificates of deposits. These are best suited to conservative investors who will be satisfied with the chance of smaller gains, with lower risk factor.

Income Funds

These invest in varied debt instruments with different maturity periods. They are good choices when interest rates have peaked and you expect the rates to start decreasing. These can provide the investor with good returns, but they involve a slightly higher risk factor than short-term debt funds.

Long Term Debt Mutual Funds

These can include plans like debt oriented hybrid funds and Fixed Maturity Plans (FMP). The hybrid fund option invests mainly in debt instruments with a small percentage of investments in equities to increase chances for good capital growth. These are generally long term investments and carry a higher risk factor, but can provide good returns.

FMPs are closed ended funds with a fixed duration. They are similar in structure to fixed deposits and you have to keep the money locked in for the stated period to get the best returns. These are low risk, stable returns options.

Debt Mutual Funds are generally considered safer than equity investments. They invest in debt instruments like government securities, corporate bonds, certificates of deposits, money market instruments, and commercial papers. These funds do not provide the opportunity for capital growth that equity funds do, so debt Mutual Funds returns are generally smaller. However, they provide safer options for the conservative and risk averse investor.

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