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Debt Fund Types- Understanding Different Types of Debt Funds

One of the popular mutual funds is debt funds. They offer stability and flexibility with low risk and hence could be a good option for conservative investors. But how do you choose the best one for you? Read on to find more about the different debt funds and their features to help you make an informed decision.

Getting started with Debt Funds

Mutual funds are increasingly becoming one of the most preferred modes of investment for new as well as experienced investors. It is largely due to the diversification they offer as well as the regular returns. Since there are different types of debt funds to choose from, you should make a sensible choice and find what will work best for you.

Before we delve deeper, let’s look at some of the key benefits of debt funds.

Benefits of Debt Funds

  • The many types of debt mutual funds are not affected by market volatility and thus is one of the best investment options available

  • Better returns than savings accounts or bank FDs

  • Low risk, but higher stability

  • Apt for new investors with low-risk appetite

  • High liquidity as you can redeem the investment as and when needed

  • Best option to achieve investment goals because of the fixed maturity period and steady returns

Top 8 Types of Debt Funds

Now that you know its benefits, here are some debt funds you should know about before investing.

  • Short-Term Funds

    As the term suggests, short-term debt funds have a shorter maturity period ranging from 1 to 3 years. They invest in government securities, debt, and money market instruments.

    Short-term debt funds may be best suited for those with low to moderate risk appetite. These funds perform best when the interest rates are high. If you have money to invest form 9 to 12 months and have a low-to-moderate risk appetite, short-term funds can be a great investment option.

  • Ultra Short-Term Funds

    These are also with shorter maturity period but mostly less than a year. While a major part of the amount gets invested in ultra-short-term debt securities, a small portion is also invested in long-term securities.

    Ultra short-term funds come with low risk and maybe the best investment option for those with a 1-12 month horizon.

  • Income Funds

    Income debt funds invest in debt securities with varying maturity periods, but most are long-term investments. The average maturity period of income funds is around 5-6 years. Income funds invest in government securities and corporate bonds, taking into account changing interest rates.

    Thus, those with slightly high-risk appetite and longer investment horizons may be best suited for income debt fund investment.

  • Liquid Funds

    Liquid debt funds can be converted into cash easily and have a very low maturity period of 91 days. The low maturity period makes them risk-free, but they also provide the most stable returns. The investment is made in Treasury Bills, CDs, or Certificate of Deposit.

    Liquid debt funds can be great options for those who have money sitting idle in their bank accounts and looking to generate reliable returns.

  • Dynamic Bond Funds

    Dynamic Bond Funds are what the name suggests. They move dynamically across long-term and short-term funds with different maturity profiles. The funds move across all classes of debt and money market instruments taking into account fluctuating interest regimes.

    Those with medium to high-risk appetite may consider investing in dynamic bond funds.

  • Gilt Funds

    Gilt debt funds only invest in securities issued by central and state governments. The maturity period ranges from medium to long-term. Since gilt funds are government-issued debt funds, there is no credit risk, and your capital remains safe. It doesn’t mean there are zero risks with gilt funds because government securities are vulnerable to changes in interest rates.

    Gilt funds are suitable for those who are willing to invest long-term and prefer government-backed investment options.

  • Fixed Maturity Plans

    As the term suggests, Fixed Maturity Plans or FMPs have a fixed locked-in period. It could range from months to years. Because of the lock-in period, the FMPs are not affected by changing interest rates. So, the NAV or the Net Asset Value of the fund remains the same. Fixed Maturity Plans are close-ended and tax-efficient and are regarded to be the best alternative to fixed deposits.

    Those who wish to deposit their money for a fixed period but are anxious about fluctuations in interest rates could opt for FMPs.

  • Credit Opportunities Funds

    Credit opportunities funds invest in different instruments. The investments range from short-term to long-term with a view to generating high interest.

    Apt for those who aim for higher returns but are willing to take some risk.

Choose from the Best Debt Funds

Take into account various factors, including the risk, the returns, the fee, the maturity period of the funds, and the tax on gains while choosing the best debt funds types suitable for you. It will help you invest wisely.