Interest rates are on their way down., When rates fall
prices, or the value of the debt assets rises. Debt mutual funds (MF) have therefore come to the fore front of retail investors . In debt MF scheme your funds are deployed primarily in fixed income instruments . There is no exposure to the volatile asset like quities. The objective of debt MF
scheme is to generate steady
returns while preserving your
capital thus providing high safety to your principal . Talking of risk of capita l invested
in them. The volatility in its
NAV is less compared to equity funds.
Debt funds also known is as income funds are funds that invest strictly
in debt related securities . The reason
for them being less volatile in returns
is the underlying securities in them.
Most common constituents of debt
MF are bonds debentures fixed deposits state and central government securities
commercial paper, treasury bills, call-money, market and certificate of deposits.
VARIANTS: Floating rate funds: They invest mostly in floating
rate instruments i. E. Is debt securities whose coupon Rate adjust according to change
in benchmark interest rates. The coupon changes
its, price does not Gilt funds. They invest only in debt
instruments issued by the government
namely T-bills and G-secs, .The government guarantee means that the they carry zero default
risk, which explains the
term gilt., The zero possibility of default
means they offers slightly
lower returns than corporate paper, which
bears an element of risk. Gilt
funds can be categories into long
-terms plans and short -term plans.
Between the two, long-term plans, on paper offer greater returns , but at a higher level of risk.
LIQUID FUNDS: While in come funds
and gilt funds are gilt funds are
debt options for the medium to long
terms . Liquid funds cater to the short term i. E an investments horizon
of up to the one year. Liquid funds invest in high safety financial
instruments whose tenure ranges from a day to a year, issued by the
governments (T-bills) banks (certificate paper and debentures.). These are called money market instruments , which is why liquid
funds are also referred to as a money market mutual funds.
Since money market instruments are the
at the short end of the tenure
scale, returns from liquid funds are relatively stable.
HOW THEY EARN: Similar
to the interest that a bank
fixed deposit gives during its tenure debt founds
funds also earn a regular interest from the fixed income securities
that they are invested in. In
additional debt funds buy the debt
instruments at a certain price and then
sell them. The differences between the
cost and sale price accounts for the appreciations or depreciations in the fund’s
value.
HOW NAV MOVES: A debt instruments market price depends on the interest rates of the its
underlying assets and also on any upgrade or downgrade in the credit rating of its holdings. Market prices of debt securities swing the with
movement in interest rates. Let’s assume
your debt fund, owns a security that yields
10 per cent interest . If
interest rates in the economy
fall, new instruments that hit the market would reflect the changed interest rate scenario and offer lower interest rates. This would
result in an increase in your funds, instruments price as the higher yield
would the raise the instruments value. As a result of the increase in the debt instruments value , your
fund’s NAV would also rise.