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.

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Frequently Asked Questions by investors:

What is credit rating in debt funds?
Credit ratings denote the creditworthiness of a company’s financial instruments. Credit ratings are distributed on the range of AAA to D. The higher the rating, the better safety the company’s asset offers.
How much does debt funds invest in debt related instruments?
Debt mutual funds invest a minimum of 65% of its investible corpus in debt or debt related instruments.
What are low-rated credit rating schemes?
Low rated credit rating schemes simply offer very low or no assurance of the safety of your investment. They may provide higher returns than higher rated credit rating schemes.

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