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What are the different debt mutual fund variants in India?

Debt funds are one of the popular investment options for middle-class Indians. The debt market comes with financial instruments that enable the purchase and sale of loans in place of interest. Regarded as less risky than equity investments, consider a debt mutual fund investment if you don’t like taking investment risks.

What are debt funds?

This type of mutual fund allocates your investment to securities generating fixed income. Treasury bills, corporate bonds, government securities, commercial papers, and money market instruments are a few examples of debt securities. Debt instruments come with a set maturity date and interest rate that you might earn on maturity. Therefore, they are named fixed-income securities. Furthermore, market movements generally have no impact on debt mutual fund returns. Therefore, people nearing retirement consider these funds the best mutual funds.

Why invest in debt mutual funds?

Here are a few reasons why you should consider investing in a debt mutual fund:

  • This variant of mutual funds is not affected by market volatility. Hence, debt funds are one of the best investment options. They might protect your funds against unpredictable and volatile market movements
  • These funds offer returns that are higher than other options like savings accounts or bank FDs
  • Debt funds are ideal for new investors who are not fans of taking investment risks
  • These funds are less risky. Therefore, they offer stability for their investors
  • One of the best options for reaching your investment goals because of steady returns and the fixed maturity period
  • Debt funds offer high liquidity. Meaning you can redeem your investment whenever you want

Now that you know the advantages of these funds, let’s look at an interesting aspect of these funds. The said aspect is the fact that these funds are not a monolith.

What are the different types of debt funds available in India?

Here are some of the different debt mutual funds that are available as an investment option in India:

  • Short-Term Funds

They come with a shorter maturity period ranging between 1 to 3 years. These funds direct investments to government and debt securities and numerous other money market instruments. Short-term debt funds may suit investors with low to moderate-risk appetites. These funds perform best during periods of high-interest rates. If you can invest for approximately 9 to 12 months and have the risk appetite mentioned above, short-term funds might be ideal.

  • Income Funds

While income funds may invest in debt securities with differing maturity periods, they mostly focus on the long-term ones. Their average maturity period is approximately 5 to 6 years. They invest in corporate bonds and government securities based on the changing interest rates. If you have a longer investment horizon and a slightly high-risk tolerance, consider an income debt fund investment.

  • Ultra Short-Term Funds

They have a short maturity period of approximately less than a year. While they mostly invest in ultra-short-term debt securities, a small part is also allocated to long-term securities. They have lower investment risks and are therefore suitable for investors with a 1 to 12-month horizon.

  • Liquid funds

Liquid funds can be converted into cash. As they come with a low maturity period of approximately 91 days, these funds are risk-free and provide stable returns. They invest in treasury bills and CDs, i.e., the certificate of deposit.

Numerous other types of debt funds are available for you as investment options in India. To choose a suitable debt fund, consider factors like the risk, the returns, the maturity period, the expense ratio and the tax on gains.

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