Debt funds, also known as fixed-income funds or bond funds, continue to maintain their appeal considering higher yields because of the high inflation and rising interest rates.
Generally, debt funds are a kind of mutual fund scheme that invests in fixed-income securities that offer secured returns, which include corporate and government bonds, and corporate debt securities, among others.
Debt funds are comparatively less volatile than the equity market. Debt funds are known to provide assured returns and fixed-interest income. Market regulator Securities and Exchange Board of India (Sebi) has divided debt funds into 16 categories. This is based on various characteristics such as duration and liquidity.
A few of the schemes available in the debt funds category include overnight funds, liquid funds, ultra-short duration funds, money market funds, medium-duration funds, long-duration funds, banking, and public sector undertaking (PSU) funds.
Generally, debt funds are known to have two types of risks—credit risk and interest rate risk. An investor needn’t focus on the higher returns in fixed-income products as there is likely to be a risk of losing invested capital due to the higher credit risk. At the same time, the risk associated with interest rates is high considering the current high rate of inflation. Investing in products that lessen the risk associated with an investment in debt and aid an investor gain decent returns remains a prudent move.
For those with an investment horizon of two-three-years, such investors should consider adding their allocation to dynamic bond funds to benefit from higher yields on medium- to long-term bonds.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
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