The debt instruments primarily invest the corpus in debt instruments like Government Securities, Treasury Bills, Corporate Bonds and other money market instruments. The investment in debt funds allows the investor to earn an interest income, a predictable, periodic income. These funds invest in securities based on their credit ratings for regular interest payment.
The prevailing interest rates in the economy determine the maturity of debt mutual funds. If the interest rates are low, the fund manager will invest in long-term debt to see reasonable returns. If interest rates are high, they will invest in short-term debt to provide you with returns as soon as possible.
Types of funds
When you invest in mutual fund, you come across several investment categories based on the maturity period. You can find different schemes for all investors with varying risk appetite and investment goals.
Gilt funds
They primarily invest in high-rated government securities and are considered safe. You can also invest in them using the mutual fund app and track the performance of your fund. They are suitable for investors who are risk-averse and want a fixed income on their investments. But as the underlying assets are government securities, these funds are sensitive to interest rate fluctuations.
Dynamic bond funds
These are funds with a dynamic portfolio. The portfolio composition in them gets updated according to the latest prevailing interest rates in the economy. Since the portfolio is dynamic, Dynamic Bond Funds do not have a fixed maturity period as fund managers adjust the portfolio based on interest rates rather than maturity. You can also invest in ELSS mutual funds online to save tax on the interest rate.
Income funds
These funds have a dynamic investment portfolio, but the underlying investment is in long-term debt. They are more stable than dynamic bond funds as the maturity period is usually five years and above. If you have a long investment horizon and cannot invest in risky equity funds, they are ideal as they carry low risks.
Short term funds
While you find many investment instruments involving SIP, these funds also invest your capital for a short term with a maturity period between one year to five years. These funds are suitable for investors who want consistent income, as they are not affected by interest rate fluctuations. These funds are ideal to invest in as a new investor or when there will be an interest rate change, as short-term debt is not as heavily affected as long-term debt.
Fixed maturity plans
They come with a fixed lock-in period and invest the corpus in corporate bonds and government securities. Fixed Maturity Plans have a pre-determined investment horizon for short-term or long-term, with investment possible only during the initial offer period. These plans work like a Fixed Deposit but offer better returns that are tax-efficient but not fixed.
You can earn steady interest income over a long investment horizon without market fluctuations.