When looking at the various schemes of mutual funds, you might come across the question, “what is a debt fund?”. It all starts with an organisation having the need to borrow money. An investor will then lend money to these companies in exchange for returns that are steady and stay constant.
When you buy debt funds, the issuer will be borrowing money from you. These investments are made in government securities, T-bills, corporate bonds, commercial papers, deposit certificates, etc. The issuer can be a public or private organisation or the government.
The focus of these income funds is to increase the value of the company’s capital as well as gain a steady lending rate. The rate of interest and duration are set in advance by the issuer. Thus, it is also known as fixed-income funds. If you have certain goals related to finance and want to accomplish them, the PGIM is one of the top fun houses that offer a range of schemes for debt mutual funds.
How Does A Debt Fund Work?
We now have a clear idea of what is debt fund. But how does it work? Determined by credit ratings, a debt fund is known to invest in a range of securities. The quality or rating of a security’s credit stands the possibility of failure to pay the debt fund returns that the security’s issuer has promised.
Debt in a mutual fund is supervised by the fund manager, who buys various instruments with the help of the funds provided by the investors. As an investor, you can earn from what is produced by these investments. In addition, the debt fund manager will guarantee that they are investing their money in a fund that is high in credit quality.
The higher the credit quality of debt security, the more interest you will receive on a regular basis. Moreover, this also means that the issuer will timely repay the principal as the fund matures. These high-rated bonds are also less volatile.
The strategy used by the fund manager to invest in debt funds, along with the overall rate of interest in the economy, will decide the time of maturity. For example, if the interest rate is low, the fund manager will invest in securities that will take a longer time to mature. In contrast, a higher rate means investing in securities with shorter maturity.
Various Kinds Of Debt Fund Schemes
You get various options when you want to invest in debt funds. These can be categorised on the basis of their maturity period, the amount of risk, as well as the objective of the investment.
Liquid Fund
The liquid debt funds are free of risk and buy into debt securities that have a maturity of a maximum of a few months. Unlike traditional avenues such as savings accounts, these debt mutual funds in India offer steady returns.
Ultra-Short Duration Fund
If you are looking for a Macaulay Duration of over 3 months, ultra-short debt funds make an ideal debt funds investment.
Low Duration Fund
Low-duration debt funds are known for investing in debt securities as well as market instruments, so the portfolio’s Macaulay Duration ranges from over 6 months to a year. This is the best debt mutual fund.
Banking & PSU Funds
The banking and PSU debt fund invests up to 80% of the assets in various securities. These include banks, municipal bodies, public financial institutions, PSU or public sector undertakings, as well as local government obligations. These may have a maturity of one to three years.
Conclusion
You are now aware of what a debt fund is, how it works and its various types. If you are confused between equity funds vs debt funds, debt funds make a better option as they are low-risk and help make your investment portfolio more stable. PGIM India offers all sorts of schemes that will fit you best, such as a PSU debt fund, low-duration fund, liquid fund, etc.
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