Debt Funds

Debt Mutual funds invest your money in financial assets that give you stable returns which have fixed income and regular rate of return against your investments. They carry very low risk and can be converted into cash easily.

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Fixed-Income Focus

Fixed-Income Focus

Capital Preservation

Capital Preservation

Professional Management

Professional Management

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Diversification

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What are debt funds?

These funds invest your money in fixed income financial instruments like corporate bonds, government bonds and treasury bills etc. 

Before moving to Debt Mutual funds, lets first understand what bonds are :-  Bonds are loans which are given to the borrowers. 
Borrowers can be - 
1. Government Institutions 
2. Corporate Bodies
3. Banks and PSUs

If a borrower wants to raise funds, they can sell bonds to the bond holder in order to get the money they need. And in return the borrower will repay the principal amount + interest in the form of regular EMIs. So the bond holder gets regular income in regular intervals paid by the borrower. 

When you invest in Debt Mutual Funds, you put your money in bonds which are issued by borrowers that are listed above.
For Example -  when you invest in Equity Shares, you put your money in shares of the companies, in Debt Funds you put your money in bonds of those companies.

Why add Debt Funds to your portfolio?

Stability - Debt Mutual funds invest your money in stable income sources.
Low Risk - Debt Funds carry low risk as they buy bonds of large and healthy companies.
Diversification - It diversifies your income into government, corporate and public sector bonds.
Give Stability to your portfolio - Investing in debt mutual funds makes your overall portfolio less risky to market movements. 

Advantages of investing in Debt Funds

Debt funds offer stable returns, lower risk, and diversification, making them ideal for conservative investors seeking steady income.

  • Less Volatile

    These mutual funds do not respond to rapid rise and fall in the stock market.

  • Stable Income

    As debt mutual funds are basically loans to borrowers who have high market value - they give you stable income in form of returns. 

  • Diversify your portfolio

    Debt mutual funds invest your money in various sources like corporate bonds, government bonds, bank and PSUs etc which increases the exposure of the funds into different sectors.

When do you invest in Debt Funds?

  • Unexpected Income

    When you get an unexpected income from your work - bonus etc or you made some extra profits in your business, rather than keeping that money in your bank, you can invest that money in debt funds which will give your regular returns.

  • Short term Planned Expense

    For example, if you want to fulfill a financial goal in a short period of time, lets say 6 months to 1 year, you should invest in debt mutual funds which will give you stable returns and your investment will not decrease in the time period. 

  • Rebalance your risk

    You should invest in Debt Mutual Funds when your financial goal is near and you want to reduce your overall risk exposure

Who should invest in Debt Funds?

Debt funds are a good option for investors who are cautious with their hard earned money and want a steady income by bearing lower risk.

  • Income-Oriented Investors

    Debt funds are suitable for those seeking regular income, as they provide a predictable cash flow through interest payments.

  • Conservative Investors

    Individuals with a lower risk tolerance can benefit from debt funds, as they offer stability and lower volatility compared to equities.

  • Investors who don't want to take much risk

    Debt Funds are good for investors who don't want to take much risk with their investments and wants a little less but stable returns 

Points to consider before investing in Debt Funds

Before investing in debt funds, consider interest rates, credit quality, expenses, manager expertise, investment horizon, and market conditions.

  • Investment Time Period

    One should understand their financial goal and see what the time period they want to invest their amount is. 

  • Expense Ratio

    Consider the expense ratio of the fund to ensure lower cost of the mutual fund.

  • Fund Manager Expertise

    Investigate the past performance of the fund manager over his/her past mutual funds and other fixed-income securities. 

  • Market Conditions

    Stay informed about the economic conditions like inflation, pandemic etc  as these factors can affect the performance of the debt funds.

Limitations of Investing in Debt Funds

Debt funds face interest rate risk, potential for lower returns, and the impact of inflation on real income value.

  • Credit Risk

    The money invested in debt mutual funds can go down if the borrower of the bond is insolvent. Insolvent means if the borrower becomes bankrupt i.e if they are unable to repay the amount of the bond. To see the credit risk, one can check the credit risk rating of the borrower on CRISIL.

  • Liquidity Risk

    If most of the mutual fund holders redeem the fund at the same time, then it would be difficult for the mutual fund companies (AMCs) to liquidate all the money at the same time because they cannot get the money till the time the bond is matured. 

  • Lower Rate of Returns

    Debt funds generally give lower rates of returns if compared to equity mutual funds or hybrid mutual funds. 

How to Start Investing in Debt Funds with INDmoney

INDmoney is here to make your investment journey smooth and simple. Let us see how you can invest in Debt Funds with INDmoney.

  • Step 1

    Download the INDmoney app and create your free investment account by completing your KYC ( Know Your Customer).

  • Step 2

    Once your Free investment account is ready, you can either search for Debt Mutual Funds or go to the mutual fund section and tap on Debt Mutual Funds.

  • Step 3

    Choose a Debt Mutual Funds by looking at aspects like past returns, volatility, downside capture ratio, AUM, Expense ratios and underlying stocks and sectors.

  • Step 4

    You can choose to set up SIP in Debt Mutual Funds or even invest as lumpSum. Once you are on the individual Debt Mutual Funds page click from the bottom “One-time” for lump sum investment or “SIP” for systematic investment plan. 

  • Step 5

    Choose the amount that you want to invest as SIP or LumpSum. 

  • Step 6

    Set up payments. If you choose to set up SIP in Debt Mutual Funds,  you can do a free automatic pay set up via bank mandate or UPI. If you choose to invest in lumpsum (one-time) then you can pay via UPI, netbanking, NEFT or RTGS.

Should you invest in Debt Mutual Funds?

Investing in debt mutual funds is prudent for income-oriented and risk-averse investors seeking stability, regular income, and capital preservation. However, potential limitations, such as interest rate risks and lower returns compared to equities, should be carefully considered. Assess your financial goals, risk tolerance, and market conditions to determine if debt funds align with your investment strategy.

Frequently Asked Questions

Debt Mutual funds are investment vehicles primarily focused on fixed-income securities, providing stability and regular income.

These funds invest in bonds, government securities, and other fixed-income instruments, aiming to generate income for investors.

Debt funds come in various types, including short-term, long-term, and dynamic bond funds, catering to different investment horizons and risk profiles.

Advantages include stable returns, lower risk compared to equities, and diversification through allocation across various fixed-income instruments.

Debt funds are suitable for income-oriented investors, conservative individuals, and those prioritizing capital preservation in their investment strategy.

Risks include interest rate risk, potential for lower returns, and the impact of inflation on the real value of income generated.

Consider factors like interest rate environment, credit quality, expense ratios, fund manager expertise, investment time period, and current market conditions when selecting a debt fund for your portfolio.

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