This is the time when everyone is willing to invest their money in some or the other form, in an attempt to generate a corpus that can be used to fulfill their short term or long-term goals. Unlike before, when everyone wasn’t keen to invest their money anywhere other than fixed deposits or a Public Provident Fund, the present time has seen a surge in investments from the common laborer to the elite upper crust of investors. And the most popular instrument these investors are using are mutual funds.
Mutual funds are pooled funds sourced from thousands of investors and invested as one collective corpus into various financial instruments like the stock market, debt funds and other fixed income securities. Based on the market that the mutual fund is investing in, mutual funds are broadly classified into equity-oriented funds, debt funds, and hybrid funds that invest in both equity and debt funds.
In this article, we’ll be looking at what are debt funds, how one can invest in debt funds and who is the ideal candidate for debt fund investment.
Unlike equity oriented mutual funds which invest most of their funds in the stock market, debt mutual funds are invested in fixed-income or fixed-interest generating instruments. What are fixed income securities? Money market instruments, corporate bonds, treasury bills and government securities are some examples of fixed income instruments. In simple terms, debt mutual funds are invested in areas where a fixed income or interest is earned at regular intervals on the invested amount.
Thus,debt funds basically have very low risk since the returns are more or less fixed, but with a catch. The catch is that the returns will be considerably lesser than those of equity funds. That may be a downer for some, but debt funds are still a better choice than keeping your funds in fixed deposits. Debt funds are most suitable for investors looking to earn nominal amounts with a low appetite for risk. Given below is a list of investors that can be good candidates for debt fund investing.
Debt fund investment can be a great choice if your scenario is one of the following:
You want to invest in mutual funds but want to stay far away from the risk of equity fund investment.
You have some extra funds at hand that you are willing to invest in something that has low risk so that you get higher returns than a fixed deposit or a savings account.
You prefer small but stable returns of debt funds over the potentially large but volatile earnings of equity funds.
You feel that the small interest earned in fixed deposits is not sufficient for you.
Now that you’ve decided that you are very much inclined towards investing in debt funds rather than equity funds, then it is time to understand how you can begin investing. The following steps will help you understand how you can invest in debt funds.
Start with some research about the debt fund that you want to choose. The easiest way to do so is to search online for the best debt funds.
Once you zero in on a fund or a group of funds, choose an Asset Management Company, which will invest on your behalf and handle the front end of your portfolio. Things to note when choosing an AMC is to look at their managing charges.
Once you have done both, all you need to do is open an account with the company that you choose by submitting your KYC documents. This can also be done online for many companies.
Once your account is open, you can begin investing in the debt mutual funds with any amount of your choice (should be equal to or more than the minimum amount required by that particular fund).
There are two main ways by which you can invest in debt funds:
By lump sum amount: You can invest in debt mutual funds by investing a lump sum amount as a one-time payment. You can further add to your investment with any amount of your choice.
Using SIP or Systematic Investment Plan: SIP allows you to invest a fixed amount every month in the debt fund of your choice. This amount can be auto debited from your account, leading to hassle free and disciplined investing.
Thus, debt funds can be an excellent option for new investors or people who do not want too much risk with their investment. For investors looking for a middle ground, hybrid funds allow them to invest partly in equity funds and partly in debt funds, giving them the best of both worlds.