Introduction To Debt Mutual Funds
Investments made in fixed deposits, employee and public provident funds and other likewise investments are very much popular. Investors prefer these investments due to its safety. However, there is one more better option than these traditional investment options - Debt mutual funds
In this article
-
1) Introduction To Debt Mutual Funds
-
2) How Debt Mutual Funds Work?
-
3) Are Debt Funds Safe?
Debt mutual funds are an investment avenue that comprises core holdings in instruments like:
- Corporate debt securities
- Government bonds
- Corporate bonds
- Money market instruments
Debt mutual funds invests a minimum of 65% of its investible corpus in debt or debt related schemes. This large portion of safe instruments in the debt mutual funds portfolio tries to safeguard your investment along with gaining decent returns.
How Debt Mutual Funds Work?
Debt mutual funds, in simpler terms, lend money to the borrowers that can be companies or governments and in return they provide a steady income on it by providing decent returns. Investors are the lenders in this case.
This is what sets them apart from equity funds which invests in shares of companies. This invested amount is then used for contributing to the welfare and growth of the company thus making you a proportional owner of the company. Due to this, equity mutual funds are a risky type of investment.
Whereas debt funds lend money to companies or governments with a fixed repayment schedule. Hence, one may say that risks in debt funds are relatively safer than other investment options.
But this safety and assurance depends on which debt schemes you are invested in since the underlying scheme’s portfolio may contain holdings having low credit ratings that may impact the overall performance of the Fund scheme.
What is credit rating?
Credit rating is the analysis of a company’s creditworthiness by carrying out certain analysis on its financial instruments. Credit ratings are distributed on the range of AAA to D based on how safe the investment is.
Credit ratings consider all the essential factors like the liabilities and assets of a company, the balance sheet, its ability to pay short term liabilities, cash flows, etc. Based on this, a rating is accredited to the company. Here is how the rating is accredited to companies.
| Rating Scale | Indian Ratings & Research | CRISIL |
| Lowest credit risk & highest degree of safety | IND AAA | CRISIL AAA |
| Low credit risk & high credit of safety | IND AA | CRISIL AA |
| Low credit risk and adequate degree of safety | IND A | CRISIL A |
| Moderate credit risk and moderate degree of safety | IND BBB | CRISIL BBB |
| Moderate risk of default | IND BB | CRISIL BB |
| High risk of default | IND B | CRISIL B |
| Very high risk of default | IND C | CRISIL C |
| Expected to default or instruments are in default | IND D | CRISIL D |
It is clear from the above table that investors should invest in top credit ratings schemes that have the minimum risk of default and have high levels of safety.
Are Debt Funds Safe?
Debt mutual funds offer a certain safety in investment although they are not entirely risk free and investors should keep that in mind. Also, investors should also look out for the credit rating of the debt schemes. The higher the credit ratings, the better the safety of your investments.
Open a free mutual fund investment account with India’s best mutual fund distribution platform & get started with your investment in the best debt funds today.
The author is a Certified Financial Planner (CFP) with 5 years experience in Investment Advisory and Financial Planning. Her strength lies in simplifying complex financial concepts with real life stories and analogies. Her goal is to make common retail investors financially smart and independent., RankMF | Last Update 30 March 2021
