Let’s understand What is debt fund with example?
One of the different types of mutual funds is the debt mutual fund or debt fund. Gradually such funds are becoming popular.
Whether it is a bank or a post office, interest rates have hit rock bottom in any permanent savings scheme. On the other hand, there is a possibility of good returns in the stock market, but the risk is high. But there are plans to build a big fund for the future. Do you not understand what to do in this situation? No worries, Debt funds are for you. If you can invest according to the plan, you can secure a large deposit for the future.
What exactly is meant by Debt Mutual Fund or Debt Fund?
One of the different types of mutual funds is the debt mutual fund or debt fund. Gradually such funds are becoming popular. Debt mutual fund managers invest the money raised in fixed instruments. Such as government bonds and corporate bonds, PSU bonds, commercial paper, treasury bills and other government securities (money market instruments) etc. These bond and money market instruments are comparatively more secure. However, before investing in debt mutual funds, several important facts must be known.
These debt mutual funds are generally medium and long-term. That is, one can invest in these funds for a period of three years or five years.
Amount of profit
Generally, debt mutual funds earn interest at eight to 10 percent compounded annually. Which is undoubtedly better than bank term deposits. And that is why its popularity is increasing among the new generation.
The return of any fund depends on the tenure of that fund. That is, for how many days the money is in circulation. A fund with good market performance can give returns of up to 10 percent in 3-5 years. Of course, this return depends on the market at that time.
The risk of the fund depends on whether the bond or debenture is being issued by the government or a private company.
Debt funds are considered to be relatively more stable than equity funds, but in some cases risks remain in such funds. Because bonds and money market instruments may fail to pay on time. Financial distress or any other reason that jeopardizes a significant portion of the fund’s total return.
As an example, let’s say a person holds this bond for 10 years. Market volatility is also more likely due to longer timeframes. In that case, there is a risk of loss as well as the possibility of profit. The same problem can occur with shorter-duration bonds.
On the other hand, looking at the fund’s rating also provides an indication of this risk. Different rating agencies in the dispersed market rate different bonds. If the rating is bad then the risk is high. If the reading is good, the risk is definitely low.
There are two main costs for such funds—exit load and expense ratio.
There are two main costs for such funds—exit load and expense ratio. What is the exit load? If a person sells the units in his possession before the expiry, a fixed amount of the due amount is deducted from the units sold. This amount is deducted by the respective fund house. The amount of this money is one percent which is determined by SEBI.
The expense ratio refers to the remuneration the fund manager receives for overseeing the entire fund. Which is usually from 0.25 to one percent. It is also deducted a fixed amount from the amount due from the units sold. This amount is also deducted by the respective fund house. After that, the remaining amount is sent to your account.