Investing can help in making money grow and reaching life goals. One of the most popular investments you can consider is mutual funds because they diversify risk and are professionally managed. Two main kinds of mutual funds are debt funds and equity funds. In this blog, we will discuss in detail about debt funds as well as how it's different from equity funds.
What are Debt Funds?
The Debt mutual funds invest mainly in fixed-income instruments, including government bonds, corporate bonds, treasury bills, among other money market instruments, and aim to provide consistent income with relatively less risk than equity funds.
Advantages of Debt Funds
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Stable Returns
Debt funds provide more predictable returns, making them suitable for conservative investors.
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Lower Risk
As they make investments in fixed-income tools, hence the risk of losing money is normally low.
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Liquidity
Several debt funds allow you to easily take your money out when you want.
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Diversification
By investing in different types of debt instruments, the funds spread the risk to various issuers and sectors.
Types of Debt Funds
Knowing the different types of debt funds will help you make a right choice for you.
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Liquid Funds
These invest in short-term money market tools that mature in up to 91 days. These are ideal to keep surplus money with easy accessibility.
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Short-Term Debt Funds
Invest in instruments having maturities from one to three years. It suits short-term financial goals.
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Income Funds
These provide regular earnings and can invest in short-term as well as long-term securities.
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Gilt Funds
Invest only in government securities, which is highly safe but also yields lower return.
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Credit Opportunities Funds
Invest in CCC and lower-rated corporate bonds in the pursuit of higher yields. Less safe than other debt funds.
How are debt funds different from equity funds?
The debt fund invests in fixed-income securities, whereas equity fund primarily invests in company stocks. This basic difference creates a different level of risk, return, and suitability.
Debt Vs Equity Funds
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Risk & Return
Debt funds return are predictable with low volatility as compare to equity funds as are volatile and risk-prone due to the shifts in the market.
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Investment Horizon
Debt funds are good for investing on short term (1to 3 years horizon) and equity funds are meant for long term investments (4 years and more) but the chances of growth are much higher in equity.
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Making Money vs. Increasing Value
Debt funds are great option to generate regular income as their interest earnings are predictable and equity funds help to increase capital over time.
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Tax Effects
Debt funds usually incur more tax liability if the investment is not hold for three years in case equity funds the gains are both short term and long term.
Debt funds are suitable for whom?
Debt funds are ideal for investors who are:
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Looking for Steady Income
If you like regular and certain returns instead of possibly higher but risky profits, debt funds are a good choice.
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Have Low Risk Tolerance
If saving your money is more important than earning a lot of profit, debt funds match your risk level.
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Have Short to Medium-Term Goals
Planning money goals within the next few years, such as buying a car or paying for education, makes debt funds a good option.
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Wants to Diversify
If you are investing in stock, adding debt funds will make the portfolio balanced thus lowering its overall risk.
Examples of Investors Suitable for Debt Funds
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Retirees
They want steady income but should not risk their savings much.
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Middel age investors
In case you are looking for fixed income for funding your kinds college tuition or supporting your elderly debt funds are great option to manage your financial needs without worrying about the volatility.
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Conservative Investors
They prefer low volatility and settle for average returns.
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Corporate Investors
Companies with excess cash, and they do not want to invest elsewhere.
If you are looking for a stable regular income with less risk, debt funds are the best option. They are very different from equity funds in terms of risk level, returns, and what suits different investors. Knowing these differences helps you to take informed decisions that align with your financial goals and risk appetite. Consider consulting an investment advisor who can help create a plan tailored to your needs and goals. Start your investment journey today and take a great stride towards your money goals. Happy Investing.