Share Market

A debt fund is an investment pool, such as a mutual fund or exchange-traded fund, in which core holdings are fixed income investments. A debt fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt. The fee ratios on debt funds are lower, on average, than equity funds because the overall management costs are lower.

The main investing objectives of a debt fund will usually be preservation of capital and generation of income. Performance against a benchmark is considered to be a secondary consideration to absolute return when investing in a debt fund. The different types of Debt Funds are given below:

1. Monthly Income Funds – These are funds that primarily invest in debt instruments, and try to give investors a monthly income in the form of dividends. The income is not guaranteed of course, and they only pay out a dividend if they are profitable for that time period. This type of a debt fund is for people who have a big corpus initially, and would like to generate a monthly income for them with low to moderate risk.

2. Capital Protection Plans: These are debt instruments that guarantee your capital, and then invest a portion of the funds in equity in the hopes of generating excess returns.

3. Gilt Funds: They invest in government debt viz. the debt issued by Reserve Bank of India on behalf of the government. They also invest in securities issued by state governments. Gilt funds can be short term gilt funds, or long term gilt funds. The short term Gilt Funds are meant for people looking to invest their money for shorter durations of say 3 – 6 months.

4. Fixed Maturity Plans (FMPs): FMPs are quite similar to fixed deposits in the sense that these funds are usually close ended, which saves you from interest rate risk, and even if rates move upwards the fund NAV doesn’t go down. They provide a sort of a tax advantage where interest on fixed deposits is charged at a higher tax rate than dividends from FMPs.

5. Liquid Funds: These are funds that are used by investors for extremely short time durations, and in most cases instead of a savings account.

6. Floating Rate Funds: These are funds that invest in predominantly floating rate debt instruments, and can invest in government and corporate securities.