• Interest Rate Risk: The value of a bond falls with a rise in interest rate. • Credit Default Risk: The risk is issued by default at the time of payment of interest or sum. • Reinvestment Risk: when the interest rate is not sure it brings uncertainty about when the fund will be reinvested in the future. • Yield Curve Risk: It is the relation between time and yield on the same risk category of securities.
DEBT FUND
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Debt Fund or credit fund is a type of mutual fund in which investments are based on a fixed income basis. The funds are invested in short-term and long-term bonds, secure assets, the money market, and floating rate debt. A debt fund provides less return compared to an equity fund it is still preferred because it is less risky and less volatile than an equity mutual fund and also it incurs less cost in management.
The most important aspect of a debt fund is its credit rating. Funds are rated on the basis of their parameters from high to low credit quality and quality depends on the average of the bonds owned by the fund. It needs to be understood that low-quality bonds typically generate high returns. Investors usually preferred debt funds when the share market is down and the volatility rate is high under equity so to safeguard their investment they put their money in debt funds.
Summary of Debt Fund
A debt fund is also termed a bond or credit fund in which the fund is invested on the basis of long and short-term and provides fixed income on investment. The funds are invested in the money market, long-term bonds, short-term Treasury bills, and in government sectors.
The debt funds are less risky and less volatile in comparison to equity fund and thus provides low return but also incurs less cost in managing the portfolio. A debt fund provides many benefits like tax benefits and easy liquidity of money as it offers a good return in a short period also. This plan is ideal for those investors who take less risk while investing their funds in the share market.
.F.A.Q
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WHAT IS THE RISK INVOLVED IN DEBT FUNDS?
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WHAT ARE THE DIFFERENT TYPES OF DEBT FUNDS?
• Liquid Funds: These are short-term funds. • Floating Rate Funds: The interest rate is reset periodically on the interest rate movement. • Short-term Income Funds: Time ranges from 3-5 years. • Long-term Income funds: It provides a greater return in the long term as the impact is greater on the interest rate. • Fixed Maturity Plans: These are close-ended funds that come with a fixed maturity period.
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WHAT ARE THE ADVANTAGES OF DEBT FUNDS?
• Road to park short-term Funds: The funds are not volatile in the short-term period under the debt fund. • Stabilization of investment: In debt funds, the investments are more secure and less risky because of the stability they provide. • Continuous income: The debt fund provides regular income.