Debt funds are mutual funds that invest in fixed-income securities like treasury bills, corporate bonds, government securities, commercial papers and other money-market instruments. Unlike equity funds, which are prone to market fluctuations, debt funds are relatively less affected by market events. There are several types of debt mutual fund options available, which you can invest as per your choice. So, what are these? Let’s find out.
Types of Debt Funds
- Overnight Funds
Overnight funds invest in securities that mature within 1 day. This category of debt funds was introduced following SEBI’s rejig exercise in 2018. As overnight funds have a residual maturity of only 1 day, they are considered to be the safest among all debt funds. If you want to invest business cash for a very short period, you can invest in overnight funds.
- Liquid Funds
Liquid funds invest in securities that mature within 91 days. You can bank on these funds if you want to build an emergency corpus for your business. As the fund invests in securities that mature within 91 days, they are less prone to changes in interest rates. They offer better returns than bank savings accounts. You can bet on liquid funds if your investment horizon is up to 3 months.
- Ultra Short Term Funds
Ultra-short-term funds are debt mutual funds that invest in fixed-income instruments of maturities of up to 6 months. In the risk spectrum, they are a little over liquid funds. However, they are still one of the lowest-risk categories of debt mutual funds. If you are willing to park your money for about six months, you can bank on ultra-short-term funds.
- Low Duration Funds
Low-duration funds are debt funds that invest in money market instruments so that the duration of the fund’s portfolio is between 6 to 12 months. As the residual maturity of the securities is for a slightly higher period, low-duration funds are a little more prone to interest and credit risks. However, they have the potential to offer better returns than overnight, liquid, and ultra-short-term funds.
- Short Duration Funds
Short duration funds are debt mutual funds that invest in money market securities so that the duration of the fund’s portfolio is between 1 to 3 years. They are more tax friendly compared to fixed deposits as they offer indexation benefits if redeemed over 3 years. Indexation helps lower your tax outgo by adjusting the purchase price according to inflation during the holding period.
Why to Invest in Debt Funds?
- Gives Stability to Portfolio
Debt funds provide stability to your portfolio during market swings. They help cut losses when markets nosedive due to volatility.
- Fetch Higher Returns than Traditional Fixed-Income Instruments
Debt funds can potentially offer higher returns than fixed-income instruments like bank FDs. More importantly, they are more tax efficient than FDs as they offer indexation benefits if held for more than 3 years.
The Final Word
Prudent investment in debt funds can not only augment returns but also help corporates be emergency ready. Parking idle cash in debt funds on weekends and holidays can help corporates leverage their potential to the maximum and use it to their advantage.
Shootih is your one-stop destination for growing business wealth in a disciplined and sustained manner. Park idle business cash in a range of debt funds as per your choice. Schedule a product demo with our expert today.
Disclaimer: Mutual fund investments are subject to market risks, please read all scheme-related documents carefully.
The content of this blog is not intended to serve any professional advice or guidance and Shootih takes no responsibility or liability in whatsoever manner for any investment decisions made by the readers of this blog or other blogs. Readers should seek independent professional advice before making any investment decision based on the information provided on this website.
