Is Investing In Debt Funds Advisable? – 5 Ways To Invest In Debt Funds Safely


The term “debt fund” refers to an investment vehicle that invests primarily in fixed income instruments such as government securities, corporate bonds, and treasury bills. This type of instrument provides you with a fixed rate of return after a certain length of time. In essence, you are making debt to the bond issuer, which the issuer agrees to return with interest at a later date. 5 key advantages of investing in debt mutual funds are outlined below. Debt funds are well-known for providing consistent returns since they are less dependent on fluctuations in the market. Debt funds invest 65 percent of their total assets in debt instruments such as certificates of deposit, debentures, bond papers, and other similar items that do not vary as much as equities do. Because they are less vulnerable to market fluctuations, they may not earn as high returns as equity funds, but they also do not collapse as precipitously as equity funds.

Debt funds are a good choice for conservative investors looking for financial appreciation while minimizing risk. When investors make investments in fixed-income instruments, which have defined maturity dates and interest rates, they are somewhat protected from the volatility of the stock market. As a result, combining these funds with other equity funds in the portfolio helps to achieve a more balanced risk-return profile. When equities funds are underperforming, they operate as a buffer against market volatility by investing in bonds.

Here’s everything you must know about investing in Debt Funds

Here are 5 Ways to invest in Debt Funds

1. Overnight Funds

The term “Overnight Funds” refers to funds that invest in assets with a maturity of one day or less, usually money market instruments. Rather than focusing on large returns, these funds attempt to even provide liquidity and convenience. They are well suited for investors (mostly corporate treasuries) that want money to be held in escrow for a short length of time.

2. Liquid Funds

Liquid Funds are debt securities having a maturity date of fewer than 91 days and investing in debt securities with a maturity date of fewer than 91 days. Their stable returns and low NAV volatility make them an excellent choice for investors looking to shelter short-term cash surpluses for a few days or weeks.

3. Ultra-short duration funds

These funds receive somewhat greater rates than liquid funds and are often seen as a low-risk investment option because of their minimal volatility. It is possible that some ultra-short duration funds would invest in lower-rated bonds to increase their returns.

4. Dynamic Bond Funds 

These funds are referred to as ‘dynamic’ funds, as suggested by their name. In other words, the fund manager is constantly adjusting the portfolio composition in response to the changing interest rate environment. Because these funds make interest rate calls as well as invest in assets with longer and shorter maturities, the average maturity lengths of dynamic bond funds differ from those of traditional bond funds.

5. Plans with a Fixed Maturity

Fixed maturity plans (FMPs) are debt funds that are close to new investors. Fixed-income assets such as corporate bonds & government bonds are also included in the portfolios of these products. Your money would be locked in for the duration of the fixed-horizon plan, which is the case with all FMPs. This time frame might be measured in months or years. Mostly during the initial offer time, however, will you be able to make investments. It’s similar to a fixed deposit in that it has the potential to generate greater, tax-efficient returns, but it does not guarantee such returns.

Who should make an investment?

Debt funds, due to their nature of being relatively steady, maybe an ideal companion for just an equity-oriented portfolio in terms of providing stability. Conservative investors who expect to hold their investments for around 5 years may benefit from investing in debt funds to increase their wealth. Liquid funds are an excellent option for anyone looking for extremely liquid places to deposit their short-term assets. 

If you are nearing retirement, you may want to consider shifting your investments away from hazardous equities funds and toward safer channels such as debt funds. Along with this, you might look at the dividend option in debt funds to help supplement your income once you retire. Those that invest for the long term and are in higher tax rates may choose to dedicate a portion of their portfolio to debt funds. 

Because long-term capital gains following redemption get the benefit of indexation and thus are taxed at a rate of 20 percent, it will reduce their tax burden for that year.

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