Sometimes when a company wants to raise and raise funds for further growth, it issues debt instruments and borrows money from investors. In return, these companies promise a steady and regular interest. Investing in debt funds is equivalent to lending money to someone and earning interest on the amount invested. While equity mutual funds primarily invest in equities and equity-related instruments, debt funds invest in fixed income securities and other debt instruments. Depending on the nature of the scheme and its investment objective, a debt fund can invest in various money market instruments such as treasury bills, company fixed deposits, debentures, call money, commercial papers, etc.

Benefits of Debt Funds

Debt funds like liquid funds and overnight funds have a shorter maturity period which allows investors to liquidate their assets easily. The short maturity period assures that investors can liquidate their debt assets in case of any exigencies.
loan schemes Make it an ideal investment option for anyone looking to build an emergency fund or a medical fund. Equity schemes like ELSS come with a pre-determined lock-in period of three years, which means investors cannot redeem their ELSS units for a minimum period of three years. However, this is not the case with debt funds as they do not have any lock-in period. While investing in mutual funds, it is important to have schemes that provide liquidity to your portfolio and debt funds can offer that liquidity.

Debt funds provide investors with stable returns with minimal investment risk. Unlike equity mutual funds, where the entire investment portfolio is exposed to market volatility,
debt fund Do not take any risk related to equity market. They invest in relatively safe instruments such as G-secs, corporate bonds, company fixed deposits, etc., making them a viable investment option for low-risk investors.

Debt funds have the option of starting a monthly SIP. A systematic investment plan is an investment method where investors can invest small fixed amounts at regular intervals in any debt fund. There is also an option of lump sum investment, but SIP investment is better for long term. Investors get a chance to choose the amount they are comfortable investing in from time to time (usually every month). Investors can modify their SIP amount based on their changing financial goals.

Are debt funds ideal for low-risk investors?

Debt funds give investors an opportunity to earn capital growth by investing in money market instruments that may not otherwise be accessible to everyone. They can also get regular income through dividend distribution. Dividend is offered when the scheme performs and generates income. These dividends are generally paid out of the NAV of the scheme.

Investors should keep in mind that mutual funds do not guarantee returns. Debt funds can offer steady income but it does not bind them to perform consistently. Although these plans are less volatile
equity fundDebt funds are also exposed to other risks such as interest rate risk and credit risk. No investment is ever completely devoid of risk, so investors should invest according to their risk appetite.

Also, it is never a good idea to depend on any one asset class for income generation. This is why mutual fund advisors generally advise investors to diversify their portfolio with their investment objective, investment horizon and risk appetite. All asset classes are less likely to perform in a similar way.

Also, before investing in any scheme it is necessary for the investors to do some background research about the fund before investing.