The debt market has many instruments that allow the loan's buying and selling to get the interest in return. Investors prefer debt fund because it is less risky than the equity market. However, it offers a lesser return than the equity market.

What is a debt fund?

Treasury bills, commercial papers, corporate bonds, government securities, etc., are debt funds. These instruments generate fixed incomes. These are given the name of debt funds because the issuer of the instruments borrows money from the investors. Debt funds offer steady and fixed income; hence they are ideal for investors seeking a low-risk investment option. All the instruments come with varying maturity periods, and the returns are unaffected by the market condition.

How does the debt fund work?

Before picking a debt fund, you must check the past performance of the fund and the returns that it has offered. This will allow you to make the right investment. The fund maturity depends on the right adopted investment strategy and the prevalent market rate.

Types of debt funds:

There are various debt funds, and you can invest in a mutual debt fund according to your financial goal and investment duration. A few short-term mutual fund investments can be compared with fixed deposits as they offer the same returns and risk. In addition to short-term funds, there are liquid funds that you can easily convert into cash and income funds like government securities and corporate debentures. Here are the common types of debt funds:

A.    Liquid fund – Liquid funds offer good returns compared to a savings account. It is the market instrument having a maturity of a maximum of 91 days.

B.    Money market fund – It has a maximum maturity of one year, and this is an ideal option for investors looking for low-risk and short-term debt securities.

C.    Dynamic bond fund– These are the debt instruments with varying maturities on the basis of interest rates. The fund is ideal for investors looking for an investment of 3-5 years with moderate risk tolerance.

D.    Corporate bond fund – It has more than 80% of its total assets in corporate bonds. They are good for investors with a low-risk appetite.

E.     Gilt fund – It invests more than 80% of the corpus in G-securities with different maturities. They don't offer any credit risk but have a high-interest rate.

F.     Floater fund – It has a maximum percentage of the corpus invested in floating rate instruments. These funds offer low-interest rates.

G.    Credit risk fund – It invests more than 65% of the fund in corporate bonds. These funds have credit risk but offer better returns.

Though debt funds are not completely risk-free, they are great investment instruments for investors who are diligent. Debt funds come with many benefits like regular income, high liquidity, convenience, etc. However, always ensure you complete your homework before investing your money in mutual debt funds.