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What is Debt Funds? Definition & Benefits of Debt Funds - ABSLMF

What are Debt Mutual Funds?

A debt mutual fund invests in a mix of debt investments such as T-Bills, Government Securities (G-Secs), Corporate Bonds and other money market instruments of varying maturities. Debt funds are less volatile and, hence, are less risky than equity funds. Debt mutual funds seek to provide investors capital preservation and regular income. There are various types and categories of debt funds available for catering to different time horizon as well as liquidity preference of investors.

Why Debt funds?

At times, it becomes difficult for individual investors to assess the changing macro economic conditions in economy like interest rate movements or there could be some debt investments which may not be available to retail investors because of their high minimum investment requirement like government securities. Here is where debt funds can bring a big benefit. They are professionally managed by experts who could help align your debt investments as per the changing macro conditions. At the same time, debt funds also provide an opportunity to invest in various debt instruments which otherwise may not be available to individual investors. Debt funds also aim to provide higher post tax returns as compared to other traditional saving instruments.

Wealth Creation
Regular cash flows
Tax Efficient
Various options available for different time horizons
Capital preservation

Who is it best suited for?

Ideal for conservative investors, these funds are apt for investors with short term goals like buying a car, vacation planning etc. as they aim to provide better tax adjusted returns along with capital preservation. Debt funds could also help retirees in providing tax efficient regular cash flows via systematic withdrawal plans. Debt funds could also used for diversifying one’s portfolio to reduce the overall risk of investment portfolio. Investors looking to invest lumpsum amount in equities could also use Debt funds for transferring small amounts at regular intervals to equity funds via systematic transfer plan. This will help investor reap the benefit of rupee cost averaging.

How Debt fund works?

A debt instrument is a legal obligation where the borrower agrees to repay the principal loan amount along with interest to the lender on a timely basis. Debt funds invest in a mix of such debt instruments of various kinds. Debt funds derive their returns mainly from two sources: first, the interest earned on their investments in various debt instruments and second in form of capital gains generated by trading i.e. buying and selling debt securities in the secondary market.