Debt funds are mutual funds that invest predominantly in fixed income earning securities. These funds are more suitable for a short term investment objective with a low level of risk.
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Debt funds are mutual fund schemes that invest a major portion of the pooled corpus of money in debt or fixed-income instruments. Examples of such instruments are corporate bonds, debentures, government securities, and money market instruments like treasury bills, commercial papers, and certificates of deposits.
Investing in a debt instrument is similar to giving a loan to the debt issuer company. When a company or government entity wants money, they ‘borrow’ from investors by issuing debt instruments. In return, they promise a steady and regular interest to the investor. This is how a debt fund works. Hence, when you invest in debt funds, you indirectly loan your money to the debt issuer company.
The main reason for investing in debt funds is to earn a regular income and grow wealth in a stable manner for short term needs. It aims to minimize risk by picking the least risky types of investment instruments. Debt funds are a safer option that aim to generate income better than bank fixed deposits. They do so by investing in different securities, based on their credit ratings. The credit rating shows the creditworthiness, i.e. whether the issuer will honor his commitments of disbursing returns and principal as promised.
A higher credit rating means that the issuer is more likely to pay interest regularly and repay back the principal amount upon maturity. These are better options than the traditional investment options like bank deposits and savings bank account.
Debt fund returns are predictable, in the sense you know the interest income and the maturity value beforehand. Thus, returns from them are in a range. This makes them safer avenues for conservative investors.
The risk of investing in debt mutual funds is lower than equity funds because they do not have market fluctuations.
The underlying debt securities have a maximum maturity of 10 years. Debt funds are better suited to the financial goals that need an assured amount of money like repayment of a loan, buying a car or money for the vacation. These goals are short to medium-term in nature.
Hence, debt funds are best for investors looking to fulfill short to medium-term financial needs.
Having only equity funds in your investment portfolio can be risky. Instead of putting all the amount in equity funds, you can diversify/ lower the risk by investing in debt funds.
The debt component helps you to cushion any downside risk of returns and works effectively in reducing the overall portfolio risk.
How to Invest in Debt Funds
An online mutual fund investment platform is a paperless, quick and hassle-free way of investing in mutual funds. You just need to create an account for handling all your mutual fund investments.
For example, Scripbox is an online mutual fund investment, tracking, management, and redemption platform.
The steps required for investing in debt funds using an online investment platform are;
Mutual funds investment can be done directly online and offline through a mutual fund house or the AMC.
A. For an online investment
You can visit the AMC website, the process involves;
B. For an offline investment
For offline investment, you need to visit the local office and submit the investment application form along with the required KYC documents.
Existing Demat account can be used for investing and transacting in the mutual fund, provided your broker provides a mutual fund investment facility. For that, your broker needs to be a mutual fund distributor.
For investing, log-in to your Demat account and look for the option to invest in the mutual fund. In the next step, you need to choose the mutual fund schemes in which you want to invest.
This method is not recommended because it is costly and time-consuming.
The process involves;
The stepwise method for investing in debt funds through Scripbox is as under;
Step 1. Visit Scripbox and Choose a Life Goal
Step 2. Create an Investment Plan
Step 3. Signup and Create an Account
Step 4. Payment Method Selection
Step 5. Bank Account Details & Money Transfer
In the final step, you need to provide the bank details for investing in debt funds. The bank account will be used for investing and crediting redemption proceeds directly with the AMC.
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Debt funds are a safer investment mechanism to plan for short term goals. They have a stable cash flow and offer the benefit of liquidity and tax efficiency over traditional investment options like fixed deposits. Debt funds are better suited for investors having short to medium-term financial needs.