In addition to being tax-efficient, debt funds offer higher returns to investors. A debt instrument is like giving a loan to the issuing entity. The debt funds invest in securities like government securities, corporate bonds, commercial paper or treasury bills that have fixed interest rates. Since debt funds are generally quite stable, they can be used as instruments for investing over short terms. Let us look at the different types of debt funds.
1. Gilt Funds
Gilt funds invest in different types of government bonds such as the bonds that are issued by the central bank on behalf of the Center. The bonds issued by the state governments are also considered. As these gilt funds invest in papers that are backed by the governments, no default risk is present. However, interest rates might be a cause of concern as they are very sensitive to changes in market interest rates. People who can appreciate risk and look for capital appreciation should invest in these debt mutual funds.
2. Short-term funds
These debt funds invest in Certificate of Deposits, commercial papers, and bonds that have a maturity of 3 to 6 months. These funds are not affected by the changes in interest rates and have a consistent return on investment profile. These funds may offer more returns if compared to liquid funds. People looking to park surplus money can invest in these low duration funds. They can have an investment horizon of 6 to 12 months.
3. Income funds
Income funds invest the corpus across debt instruments, government securities, and corporate debentures. These funds can invest across a range of maturity profiles. They also have the flexibility to invest in short-term instruments of 2 years. They can even invest in long tenure papers such as those extending for 20 years. The income funds take advantage of the rate movements and make aggressive calls. These funds work well for long-term investors with good risk appetite.
4. Fixed maturity plans
As the name suggests, these plans have a fixed maturity. They invest in the papers with matching maturity. These funds are held till maturity and hence do not have interest rate risk. The fund NAV is not affected even if the rates increase. The returns of FMPs are quite predictable and are not guaranteed. There can be some re-investment risk if the interest rates are low.
5. Liquid funds
Liquid funds invest in highly liquid money market instruments such as Certificates of Deposit, Treasury Bills, and Commercial Papers. These funds offer easy liquidity and can be a substitute for a savings bank account to park the surplus amount. Liquid funds are perfect for people with bigger amounts in hand available for investment. They offer better interest returns compared to banks. These funds should be invested for a concise term from a few days to months. They offer major return rates.
These are some of the debt mutual funds that can help you earn profits.