Financial markets are an ocean full of investment options. They provide all types of investments for all types of investors and in different conditions. If you are a new investor and looking for a safe investment, debt funds can be a good option.
A debt fund in a mutual fund is a market instrument that invests in debt securities, majorly bonds, and other fixed-income instruments. These funds promise a fixed income to the investors and thus are less risky.
How do Debt Funds Work?
To understand debt mutual funds meaning, let’s understand how they work.
A debt mutual fund invests in fixed income securities, including bonds and debentures issued by various financial institutions, governments, and banks, and money market instruments like certificates of deposits. These funds are more popular among investors with a lower risk appetite as they offer a fixed rate of returns.
Based on the various types of debt funds, an investor can benefit from the different opportunities they bring.
Total Expense Ratio (TER):
As the mutual funds are being managed and administered by fund houses, the related charges are liable to be charged proportionately to these funds. The TER or Total Expense Ratio measures such charges and includes fees for administration, management, audit, custodian and registrar, and expenses related to marketing, advertising, and transaction. The TER gets calculated as a % of the average NAV.
There is an upper limit set for TER by SEBI:
|Assets Under Management (AUM)||Maximum TER for Equity funds (percentage of daily net assets)||Maximum TER for Debt funds (percentage of daily net assets)|
|On the first Rs. 500 crores||2.25%||2.00%|
|On the next Rs. 250 crores||2.00%||1.75%|
|On the next Rs. 1,250 crores||1.75%||1.50%|
|On the next Rs. 3,000 crores||1.60%||1.35%|
|On the next Rs. 5,000 crores||1.50%||1.25%|
|On the next Rs. 40,000 crores||Total expense ratio reduction of 0.05%for every increase of Rs.5,000 crores of daily net assets or part thereof.||Total expense ratio reduction of 0.05%for every increase of Rs.5,000 crores of daily net assets or part thereof.|
|Above Rs. 50,000 crores||1.05%||0.80%|
Types of Debt Funds in India:
Now that you have understood what debt fund in mutual funds is, let’s understand the debt fund types.
There are different types of debt funds based on maturity and the different types of underlying instruments they invest in.
Based on Duration:
|Types of Debt Funds in Mutual Funds||Feature|
|Short Duration Funds||These types of debt funds invest in securities with maturity of 1-3 years|
|Ultra-short Duration Funds||These types of debt funds invest in securities with 3-6 months term maturity|
|Overnight Funds||These debt funds types are highly liquid funds investing in instruments with a 1-day term maturity|
|Long Term Funds||Funds investing into long-term funds with a maturity greater than 7 years|
Debt Funds Types Based on Security:
|Debt Fund in Mutual Fund Type||Feature|
|Bond Funds||These funds invest in corporate bond securities|
|Money Market Funds||These funds invest in money market securities like commercial paper|
|Government Bond Funds||These are funds investing in government bonds, being the safest of all options.|
Who Should Invest in a Debt Fund?
Now that we are clear about the debt mutual funds meaning, let’s understand who it is ideal for.
Debt mutual funds invest in multiple classes of securities, making them capable of earning, if not high, moderate returns. Even though these returns are moderate, they are not guaranteed as these are market-based instruments. However, they are much safer than equity funds.
Hence, they are ideal for investors risk conservative investors. In addition to this, debt fund in mutual funds are also ideal for investors who have short-term as well as medium-term investment objectives. While short-term investments can last a few months to a year, medium-term investments often expand to five years.
Things to remember while investing in Debt Mutual Funds
Now as we are done establishing the debt mutual funds definition, here are various factors that you have to be mindful of if you plan to invest in debt mutual funds.
1. Have a Clear Intention for Investment and Returns
Debt funds are basic investment options and thus give minimal returns. If your expectation from an investment is a high return, you can look for other options.
2. Exit Load
Always look for exit load charges before diluting your position to book the returns. Sometimes, these charges are hidden and may come as a surprise while squaring off. Similarly, investors have got entry load expenses levied in some funds. Understand all these extra expenses before entering into any market position.
3. Read the Offer Documents Carefully Before Investing
Investors should genuinely read all offer documents before making investment decisions. Sometimes, charges are in-built and require calculation. Once the documents are carefully understood, investors can make informed decisions.
4. Other Charges
Investors should understand the TER of the respective fund, calculate their returns and invest accordingly. The lower the expense ratio of the fund, the higher the NAV.
5. Portfolio Returns are also Dependent on Systemic risks:
In a portfolio with a mix of equity and debt funds, systemic risks can affect the returns for equity funds. If you have calculated your overall returns based on a particular situation, it may get affected by such risks. Hence, overall returns cannot be determined only based on debt funds.
Pros and Cons of investing in a Debt Fund:
|Low risk||Low returns|
|Fixed returns||Unpopular with aggressive investors|
|Independent of market volatility||Can cause confusion to new investors due to wide range available in market|
|Popular with conservative investors||–|
Best Performing Debt Mutual Funds
|Name||Expense Ratio (%)||Returns (1 year p.a.)|
|Aditya Birla Sun Life Medium Term Fund||0.87||25.01%|
|UTI Bond Fund||1.29||17.4 %|
|UTI Banking & PSU Debt Fund||0.24||10.1%|
|UTI Treasury Advantage Fund||0.32||8.83%|
|UTI Short-Term Income Fund||0.34||8.36%|
How Debt Funds are Different from Other Mutual Fund Schemes?
Mutual funds operate different types of funds. One of them being the debt fund. Other significant type includes equity funds. The major differences between them revolve around investment instruments, risks, and returns. A debt fund invests in debt instruments, including government bonds, government securities and corporate bonds. An equity fund, on the other hand, invests in stocks of different companies.
In addition to that, debt funds are comparatively safer when it comes to investment security. But this doesn’t mean they provide guaranteed returns. If your goal is to get higher returns, debt funds might not be the right fit. Instead, you can invest in an equity fund as it projects high returns with a high level of risk involved.
On top of it, the expense ratio of debt funds is comparatively lower. Timing isn’t also of greater relevance in debt mutual funds when compared to equity. Instead, duration matters the most when you are investing in debt funds.
Debt mutual funds do prove to offer benefits for young investors and senior citizens. While higher risk gives higher returns, one can always opt for these funds to stabilize themselves and hedge against riskier assets. However, in any case, investing with all points in mind, and with all precautions gives good returns to investors. There are many entities in the market which offer mutual fund schemes. Choose the right service provider based on all the available facts.
Remember, invest right now for a safe and secure future!
Invest in Mutual funds with a long-term horizon. Short-term volatility may create short-term risk, but in the long run, investment in mutual funds gives good returns.
Debt funds in mutual funds suit a mix of investors with lower risk-taking capacity and expect fixed returns. Equity funds suit the other set willing to take higher risks and expect higher returns. Remember, returns from the stock market are unlimited. Priority should be set based on your preference.
While funds with good ratings do give good returns, you cannot generalise this fact. Any fund can give good returns in the future. You should analyse the set-up for understanding returns.
Investing in mutual funds gives assured returns. Even if one invests in debt funds, they have assured a minimum fixed income. However, if you are not prone to risks, you can definitely go ahead with debt mutual funds.
Yes, mutual funds are a good option to diversify the market risks. As mutual funds invest into a group of securities, the risk automatically multiplies.
You can start by applying through a bank or through Investor Service Centers of Mutual Funds or Registrar. Alternatively, you can opt for online investment by applying on the chosen fund’s website.
Even though debt funds carry low to medium risk, they are not risk-free. Debt funds neither guarantee you fixed returns nor prevent you from any financial losses. This is because debt funds still invest in market-linked instruments that are affected by market fluctuations, however, to a lower degree. The various types of risks that an investor can experience include interest rate risk, credit risk, reinvestment risk and inflation risk.
No, debt funds are liquid. This means you can withdraw them anytime; they do not have a lock-in period.
If you compare short-term debt funds to other savings schemes, such as fixed deposits, then they are evidently a better option. This is because they offer higher returns, are much more liquid and offer numerous taxation benefits. They are ideal if you are looking for options carrying low-moderate risks.
Read more about Tax Saver Mutual Funds.