What are Debt Funds and How to Invest?

Mutual funds are an ideal investment vehicle for investors who lack the know-how to invest in stocks. There are different kinds of mutual funds, including debt funds. This article elaborates on what are debt funds so that one can make an informed investment decision.

Let’s begin!

Debt funds are a type of mutual fund scheme that primarily invests in different types of fixed-income securities, such as bonds, treasury bills, etc. As a result, a debt fund offers steady and regular income to investors in the form of debt fund interest rates.

Moreover, as they invest in fixed-income securities, the best debt funds involve less risk than their equity counterparts. That said, they also offer lower returns.

Now that you know what debt funds are, let’s understand how they work.

A debt fund invests in a range of securities depending on their credit rating. Here, the credit rating of a security refers to the risk of default of its issuer. In simpler words, a high credit rating implies that the issuing entity of a security is more likely to pay the principal upon maturity as well as regular interest. 

Therefore, fund managers ensure that debt funds invest in instruments with a high credit rating, which are less volatile than low-rated ones. Moreover, the performance of a debt mutual fund depends on the investment strategy of its fund manager.

In addition, an economy’s overall interest rate also impacts its performance. This implies that a falling interest rate regime allows a fund manager to invest in long-term securities. On the other hand, in a rising interest rate regime, he/she will invest in short-term securities.

Investors willing to invest in Debt funds can follow any of the two investment ways mentioned below.

• Lump sum Investment - In this method, individuals who have surplus money and want to invest in one go can opt for a lumpsum investment.
• Systematic Investment Plan (SIP) -  Individuals who want to invest smaller portions at regular intervals can choose a Systematic Investment Plan as their ideal investment method for debt funds.

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