What are Debt Funds?



What do you mean by debt fund?


Funds invested in debt instruments, including bonds, notes, and other debt securities, are known as Debt funds. These funds can be actively or passively managed and structured as either open-ended or closed-end.


Types of Debt Funds in India


Some of the best debt funds in India are dynamic bond funds, fixed maturity plans, credit opportunity funds, gilt funds, and income funds.


  • Dynamic Bond Funds: Diversifying your retirement portfolio with dynamic bond funds is a smart move


  • Fixed Maturity Plans: A great way to invest your money for the long term is FMPs. Fixed Maturity Plans typically hold onto investments between one and three years. It is a dynamic investment plan if you want consistent returns without incurring major financial risks of losing capital due to uncertain and volatile markets.


  • Credit Opportunity Funds: Credit opportunity funds are among the riskiest debt categories. These newer, high-yielding investment products seek to generate returns by taking on credit risks or holding lower-rated bonds with higher interest rates.


  • Gilt Funds: Gilt funds are a type of investment fund that invests in government debt, also known as gilts. Investing in these funds is a safe option for those who want consistent and guaranteed returns.


  • Income Funds: Income funds are investments in a mix of different debt instruments, including government securities, corporate bonds, and PSU bonds. These funds offer moderate returns and are reasonably safe.





Benefits of Debt Fund Investments


Debt fund offer investors several potential benefits, which include:


  • Higher potential returns than cash equivalents: Debt fund have the potential to generate higher returns than other investments such as savings accounts or money market funds.


  • Increased diversification: Debt fund can help investors diversify their portfolios. Investors can also reduce the overall risk to their portfolios by investing in various debt instruments.



What are Debt Fund Ideal for?


Debt fund is a dynamic way of earning for investors with short-term or long-term investment goals. One category of people invests in short-term debt fund,  ranging from three months to 1 year, while another invests in long-term debt funds that last for three to five years.


Short-term debt fund: Holding on to your money for too long can be costly, but it may make sense if you’re looking to invest for the short term. The liquid fund offers higher returns of 7%-9% along with similar liquidity for emergency requirements.


Long-term debt fund: Debt fund is a great way to earn high returns while enjoying interest rate volatility. The best debt funds for the long term can be debt bonds that offer a more generous and higher rate of interest than bank fixed deposits.


Why should you invest in debt mutual funds?


Debt mutual funds aim to generate income for investors through regular interest payments and principal appreciation. For example, government bond funds tend to be less risky than corporate bond funds but offer lower returns. In most cases, professional money managers handle these funds.


Debt fund offer stability and predictable returns, which can be helpful for investors who are learning about investing. In this video, we’ve covered essential details about debt fund and the best debt funds to invest in India.


Watch the YouTube video by Franklin Templeton India above to understand how you can generate higher potential returns with your short-term as well as long-term investment goals.



Interested in how we think about the markets?

Read more: Zen And The Art Of Investing


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