3 Important Points to Remember While Investing in Debt Mutual Fund
By Anupama Deshpande | Jan 10, 2019

Debt Mutual Fund provides a regular and steady income to investors but it is quite different from bank fixed deposit where you receive a fixed interest. Debt Mutual Fund is more safe investment avenue than equity investment but it does not guarantee any interest rate as the rate of interest purely depends upon debt market and the debt instruments where the fund manager has invested the funds of the debt scheme.

The investment of debt mutual fund is made majorly in debt/ fixed income securities. Debt Mutual Funds usually invest in a mix of debt and fixed income securities such as Commercial Papers, Treasury Bills, Certificate of Deposit, Government Securities, Corporate Bonds and other debt securities of different tenures. Such Debt Oriented Securities have a fixed maturity date and also pay a fixed rate of interest.

Debt mutual funds are considered as ideal investments for conservative investors who are risk averse. It is best suited for those investors who require a regular income during the period of investment.

Given below 3 important points to remember while investing in debt mutual fund:

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You must know that there are two modes in which you can make investment in debt mutual fund which are as follows:

• Lump Sum Investment: You can invest whole amount at once in the debt instrument. This will be helpful in the situation when the debt fund market is comparatively down.
• Systematic Investment Plan (SIP): You can invest your amount in small and regular installments over a period of time. This will be helpful for the investors to make a rupee cost averaging while investing their funds.

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You must be aware of different type of debt mutual funds which may be short term, medium term long term. Mentioned below some of such types of debt mutual funds:

• Liquid Fund
• Gilt Fund (Government Securities)
• Income Fund
• Ultra Short Term Fund
• Dynamic Bond Fund
• Fixed Maturity Plan (FMP)

Fund managers invest the money collected under debt funds in the papers of various companies. Credit Rating Companies such as CRISIL, Care, etc., rate the papers of these Companies.

Some of the debt funds invest in lower rated company papers in order to generate higher returns. Sometimes any of such companies fails to meet repayment obligations (either interest or principal repayment), which is called credit risk.

When the issuer of a debt instrument defaults on payments on the due dates, the investor has to bear this loss.

This risk is always associated with investment in debt mutual funds. So there are always some chances for such funds to lose the invested money whose impact will ultimately come on the shoulders of debt fund investors.