Debt funds are investment instruments that have 5 features –
Low risk
High assured returns between 7 to 8 % (which are not dependent on the market)
High liquidity (you can take your money out when you need it)
Low volatility (as it’s not market dependent and returns are mainly fixed)
High benefit in taxation.
Unlike equity mutual funds that invest money in stocks and shares, debt funds are mutual funds that invest your money in fixed-income securities for which interest is gained.
Simply put, you can think of a debt fund as a loan that you give to a company, institute or the government on which you receive fixed interest – meaning, you make money on it.
Debt funds can help diversify an investor’s portfolio by investing in different types of assets. If one type of asset (e.g., corporate bonds) is performing poorly or has become too risky for investors to consider investing in anymore, then the investor may switch to another type (e.g., junk bonds).
This diversification helps reduce risk and increase potential returns for investors who choose to diversify their portfolio by investing in debt funds rather than holding all their investments in one particular asset class such as stocks or bonds alone.
