Although there are different investment instruments, you cannot choose any random one and start depositing your funds with the expectation of higher returns. The return to risk ratio, tax exemption, exposure to the trade market volatility, and so on vary from one investment method to another. Therefore, you must understand which one you want to move ahead with to get maximum returns on your investment. In recent times, debt funds have become quite popular owing to their long list of advantages that you can leverage to get the best out of the funds invested in the liquidity pool.
However, many people are aware of these funds or know the process for investing. If you want to move ahead with debt funds, you must understand and know every single aspect of this, at least the fundamentals, so that you don't make significant mistakes and risk your investment. Keeping this in mind, we have compiled a beginner's guide to help you invest in the debt fund without any problem.
What is a debt fund, and how does it work?
Debt funds are like mutual funds with an investment pool where the core shareholdings are based on fixed investments. You can invest in multiple instruments while choosing a debt fund. For example, you can go for short-term or long-term debt bonds, a floating debt rate, secured bonds, and so on. All these instruments have a fixed interest rate and a majority period. Therefore, the returns of debt fund investment remain constant until and unless you invest in multiple instruments to get variable ROI.
Types of debt funds
- An overnight fund is one of the best debt funds where the maturity period of the investment instrument is one day. That's why it is the best option for beginner investors or those who want to avoid risk.
- The liquid fund consists of debts and other instruments with a maximum maturity period of 90 days. The best part of this fund is that the investor can make a withdrawal or liquefy the investment at any point without any lock-in period.
- Low-duration funds have a maturity period of 6 to 12 months, and the investment is made in different money market instruments.
- Money market debt funds consist of securities with fixed income and a maximum maturity period of one year. It is highly liquefiable and can generate higher returns if the interest rate on the fixed income is high.
- Credit risk fund invests in money market papers with a rating of AA. They can generate high returns, owing to the high-interest rate, but you must remember they have credit risk.
What are the benefits of debt funds?
Before investing in debt funds, you must know the benefits of mutual funds or any other instrument prevalent in the current market. For this, we have briefly listed out some of the advantages of our debt fund that you can enjoy as an investor.
- The debt funds are highly liquefiable. It means that you can sell your holdings and withdraw the money at any point in time without worrying about the returns earned on the shares you had.
- Since the debt funds are based on a fixed income, you won't have to worry about the risks from equity or the stock markets. Therefore, it is the best investment option for beginners worried about the feed markets' risks.
- You have to pay the tax on the debt fund only when you redeem the amount. Therefore, the chances of saving on tax payable are much more than the traditional forms of investment.
Conclusion
Now that you have a brief idea about debt funds and their benefits, you will decide which fund type you want to invest in based on the majority period and the return on investment.
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