One of the main instruments present in the financial markets in which people invest their hard-earned cash to make some gains is debt. The debt market has a lot of instruments that help in the selling and buying of loans in exchange for some interest. It is seen to be less risky than similar investments in equity. Many investors have a lower risk tolerance and prefer to go with debt instruments. But the debt investments give lower returns when compared to equity investments. In this article, we will look at mutual fund debt and discuss the various kinds of mutual fund debt instruments along with their advantages and other things.

What is a Mutual Fund Debt Fund?

These funds invest in assets that generate some fixed income. These include money market instruments such as government securities, commercial papers, corporate bonds, and treasury bills. All of these instruments have an interest rate and a maturity date that is fixed beforehand. This helps the buyer to earn when the instrument reaches its maturity. That is why they are known as fixed-income securities. The profits from such instruments are not affected by any fluctuations in the financial markets. So, mutual fund debt securities are seen as investment options with low risk.

How do Mutual Fund Debt Funds Function?

Each mutual fund debt security has a credit rating that permits investors to find out about the probability of default by the issuer of the instrument in giving the principal amount and the interest back to the investor. The debt fund managers utilize these ratings to choose high-quality debt instruments. A higher rating shows that the issuer is not going to default on the instruments. The next question that comes to the mind of many is whether mutual fund debt instruments also invest in low-quality debt instruments. The answer to this question would be in the affirmative. The fund managers choose securities that are based on a lot of factors. Sometimes, selecting low-quality debt security gives a chance to get higher returns on the debt investments, and the fund manager takes risks after considering all the elements. But a debt fund with high-quality shares in the portfolio tends to be more stable. Also, the fund manager can also select to invest in short-term or long-term debt securities. This depends on whether the regime of the interest rates is rising or falling.

Should You Invest in Mutual Fund Debt Instruments?

These instruments are for people who do not have a high tolerance for risk. There is no surety of obtaining fixed returns with any investment in the financial markets. The returns are typically in the expected range. These instruments typically invest across a lot of securities to get stable gains. So, the investors who prefer not to take on a lot of risks find them good for their cause. The mutual fund debt instruments are also present for short-term investors who keep the instruments for not more than a year. These people can use these mutual fund debt instruments instead of a usual savings account. The liquid funds will give you returns of nearly 10%. Also, you will not give up on any liquidity. Medium-term investors want to remain invested for not more than five years. For them, the first thing that they gravitate towards is a fixed deposit with a financial institution. Investing in any dynamic bond fund for a similar tenure also gives better returns than fixed deposits. You may also be someone that may need monthly payouts like interest on fixed deposits. Then you can go for a monthly income plan with the mutual fund debt instruments.

Types of Mutual Fund Debt Instruments

Based on the overall maturity period, the debt funds can be separated into various kinds. One of them is liquid funds. These invest in instruments that have a maturity of three months. Liquid funds tend to give more returns than savings accounts. They are a good alternative for making short-term investments in the financial markets. The funds invest in money market instruments with a maximum maturity period of not more than a year. These funds are great for investors that want low-risk debt securities for the short term. The dynamic bond funds invest in debt instruments that have varying maturities. These are based on the overall interest rate regime. These funds are quite good for investors with moderate risk tolerance and a horizon of investments under five years. The corporate bond fund invests a minimum of three-fourths of its total assets in corporate bonds with the highest ratings. These funds are great for investors with lower risk tolerance and looking to invest in high-quality corporate bonds.

The banking and PSU fund invests at least three-fourths of its total assets in debt securities of financial institutions and public sector undertakings. The gilt fund invests most of its total investable corpus in government securities across differing maturities. These funds do not have any credit risk. But the interest rate risk is seen to be high. The credit risk fund invests a minimum of 60% of the investible corpus in corporate bonds with a rating below the highest quality bonds of corporations. So, these funds have a credit risk that helps them give more returns to the investor than the highest quality bonds. The floater fund invests a minimum of 60% of its investible corpus in instruments that have a floating rate. These funds have a low risk of interest rate. The overnight funds invest in debt securities with a single-day maturity. These funds are seen to be very safe because both the interest rate risk and the credit risk are nearly zero.

Conclusion

The individuals who make investments in debt funds are usually those investors who would like to diversify their portfolios in the financial markets. The debt funds usually perform quite differently from the equity funds, including shares' ETFs. If the prices of the shares decline on a given day, the prices of bonds will not decline as much. They can even see a rise. For this reason, combining mutual fund debt fund instruments with stock funds decreases the fluctuations in your portfolio in the financial markets.