Debt mutual funds are investment instruments that allow investors to build up a portfolio of debt products like securities, bonds, and more without the need to vet every investment on their own. A debt mutual fund offers all the accessibility associated with mutual funds while being much safer than equity-based funds. Debt mutual funds are a part of every sophisticated investor's portfolio, especially to hedge against volatility. There are many types of debt funds available in the market and the biggest difference in most debt funds is the duration of the investment. From differing maturity periods to different returns and risks, there are different types of debt funds that you can choose depending on your investment horizon and risk appetite.

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Short-term and liquid funds are great for those investors who are looking to park their money and have secure returns. Medium-term debt funds are helpful for those investors who are building a comprehensive portfolio, as they help minimise market risks. While long-term bonds can be risky, they also offer fixed income allocation and can be a good addition to your portfolio. 

Liquid Debt Funds 

If you are looking for only a short period of investment then overnight funds and liquid funds are ideal for you. Overnight funds come with a holding period of just one day. On the other hand, most of liquid funds have a maturity period of upto 91 days. These funds can be redeemed after just seven days without any penalties. These are safest options for those investors who want lowest risk and to protect their principal amounts.  

Short-term Debt Funds 

These are ultra-short duration and low-duration funds which offer a slightly higher return than the fixed deposits at a relatively low risk. If you are looking for an investment in good credit quality instruments with a horizon between three months to one year then you should add such funds into your portfolio. 

Medium-term Debt Funds 

If you are looking for higher return on your Mutual Fund investments with a calculated risk then you should opt for these categories of funds. These are medium term and medium to long duration funds which come with a maturity period between 3 years to 7 years. The long duration funds generally have maturity period of more than 7 years. These categories of funds offer potentially higher return, but there could be comparatively higher risk. Most of such funds payout regular interests. You can opt for these funds if you are looking for a longer investment period with higher returns.

Special Debt Funds 

The investors who are looking for a mix of higher return and long duration of investment with diversification of portfolio can choose money market funds, dynamic bond funds, carporate funds, Gilt funds and floater debt funds. Money market funds don’t have a fixed maturity period and they invest in currency instruments including treasury bills and commercial papers.  Dynamic bond funds adjust according to market conditions and if you can a keep a watch on when to buy or sell your units as per the interest cycle then you should opt for such funds. Corporate funds and credit risk funds are directly linked to corporate debt instruments. These bonds offer higher return but could be prone to market volatility. On the other hand, Gilt funds invest a majority of their assets into highly rated government securities. These funds are some of the safest but can suffer from interest rate risks. 

Conclusion

There are a wide range of debt funds available in the market and you should draw your investment plan before choosing any particular type of fund. You should choose debt funds based on your risk assessment, investment horizon and financial goals. Based on your financial goals you should choose the debt funds and a mix of liquid funds, short-term funds and long-term funds could be a good addition to your portfolio. If you are looking for a risk-averse investment and low exposure to equity markets with a stable return selecting a mix of different mutual funds could be ideal for your portfolio. Those who have equity heavy portfolio can also consider investing in debt fund which will allow diversification and liquidity. This will serve as a cushion against volatility of equity funds and bring stability to the investment portfolio.

[Disclaimer: Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.]

 

(Above mentioned article is a consumer connect initiative, This article is a paid publication and does not have journalistic/editorial involvement of IDPL, and IDPL claims no responsibility whatsoever.)