A debt fund is a type of mutual fund that primarily invests in a mix of fixed income debt instruments such as T-Bils, Government Securities (G-secs), Corporate Bonds and other market instruments of varying maturities which offer capital appreciation. Debt funds have pre-determined maturity dates and interest rates. There is a lower credit risk in debt funds because you are basically lending money to the government and companies. Debt mutual funds are less volatile and hence less risky. 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.
Debt mutual funds offer numerous advantages to investors.
• High liquidity
Debt funds are highly liquid and can be redeemed easily in case of a financial emergency by placing a simple redemption request. Since there is no lock-in period involved in debt funds, you can, you can convert them into cash very quickly.
• Low-cost investment
As per SEBI norms, the total expense ratio of a debt mutual fund cannot be more than 2% of the asset under management. Within the debt funds category, overnight and liquid funds are associated with notably low expense ratios, whereas dynamic and long-term funds come with higher expense ratios.
• Hedge against volatility
Debt funds are not much impacted by market volatility and hence can serve as an excellent hedge against market volatility and unpredictable market events.
• Low portfolio risk
Debt mutual funds carry lower portfolio risk and a strategic allocation can ensure stability to your investment portfolio. They are ideal for investors with low-risk appetite.