Debt funds have been gaining popularity since 2008 when market crashed. Even after 4 years, the market has not touched the level it was in 2008. What this means at a high level is that the market has given negative returns over the last 4 years. An investor would have earned at least 30% had he invested in debt funds starting from 2008.There are few fund houses that are now encouraging SIP option in debt funds. It doesn't make much sense from investing perspective but it is a good option from discipline perspective. Let's look at the different types of debt fund available in the market for investment.

 

Types of debt funds

 

Liquid and ultra-short term funds: These funds are used by Institutional investors to provide liquidity and returns. Typically when institutional investors want to place their money for a few days or months to get better returns within that short span of time, they put it in liquid and ultra-short term funds.

Short term debt funds: Investors who need to place funds for more than 3 months invest in short term debt funds. The purpose is similar. Short term funds can be used by institutional as well as retail investors.

Medium term and income funds: Medium term funds are the ones with investment period of 6 months to 18 months. Usually, smart investors when they see temporary slowdown in the economy and stock market and they want to place their investment in instruments which provide good returns with safety, they go for it.

Long term gilt funds: Long term gilt funds have maturity period of many years. Gilt funds include long term Government securities which are backed by Government and hence are risk free. If investors have long term plan, Gilt funds or investing in Gilt directly are good options. The returns are in the range of 5% to 8%.

Fixed Maturity Plan: These are funds with fixed maturity and hence investors with specific period in mind should invest here. FMPs have gained popularity in recent times because they serve the specific needs of people where they want to invest for a specific time.

Debt oriented hybrid funds: Mutual funds also offer hybrid debt funds, which are recognized as monthly income plans and balance funds. These funds primarily are mix of various asset classes which are devised to cater to specific investment needs of investors. Debt oriented hybrid funds differ in proportion of debt. Investors must know the proportion of debt and equity in the fund to understand the risk and expected returns. A relatively higher proportion of equity will expose investors to higher risk.

 

How to invest in debt funds

There is no specific time to invest in debt funds. It also doesn't depend on the investment horizon in the same way equity investment depends. The most important thing to consider in debt investment is interest rate cycle. Debt funds do well when the rates go down and do bad when rates soften. Investors must see where they stand in the cycle. Take today's example, we are at the peak of the interest rate cycle. Hence the rate will soften in future. RBI has also indicated the same. In fact 2 days back, RBI cut the CRR by 75 basis points. This means this is the right time to invest in debt funds as there will be appreciation as interest rates are cut.

Additionally, investors should not invest all the money in debt funds. While the risk is low, it doesn’t give you above average returns. If you can take little risk, invest a part of your fund in equity.

 

 

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