Debt mutual funds are not covered under 80C of the Income Tax Act, of 1961. Suppose John owns a company that has recently acquired two rounds of funding from venture capitalists. They made massive sales in the first few years and also received appreciation from customers.

The following sections of this blog will cover important details related to these funds.

Therefore investors, lenders, banks, and financial institutions avoid such borrowers. Mutual Funds that use a Duration Strategy have significant interest rate risk i.e. the fund might incur a loss if the interest rates start moving upwards instead of downwards. To mitigate this risk, these Debt Funds often invest in shorter-duration Bonds when an Interest Rate what is debt fund with example increase is predicted.

Total Expense Ratio of Mutual Fund Schemes

It includes management fees, administrative costs, and other operational expenses. A higher expense ratio can significantly reduce the net returns to investors over time. Therefore, it is essential to compare the expense ratios of different debt funds before investing. Lower expense ratios are preferable as they ensure that more of the fund’s returns are passed on to the investors​.

Bond Fund

Investors who can bear a little risk can go for short term debt schemes as the returns are higher than the recurring deposits. Debt mutual funds are those funds that invest in a mix of debt with fixed income and other debt securities but major portion of the investment is in fixed income debt securities. For investors who want a secured type of investment with minimal or no chance of default, fixed deposits are the most preferred type of investment. Fund of Funds provides access to particular asset classes, such as international companies, that would otherwise be difficult for investors to invest through regular mutual fund schemes.

How Do The Top Performing Debt Funds Work?

While there’s an overlap, distressed debt and junk bonds are not identical. Junk bonds are high-yield bonds with a lower credit rating, but they may not be in immediate danger of default. Distressed debt is more severe, often reflecting issuers in default or on the verge of it. Revenues from taxes, special assessments, or other income sources are directed into this fund. The money in the fund is then used exclusively to make interest payments and to repay the principal on the debt as it becomes due.

Who Invests in Distressed Debt?

It acts as a bridge between them to raise money from investors and utilize the same to finance companies. For instance, four investors may put their funds here, and later, the fund will direct them to the needed borrower. Floater funds are schemes predominantly investing in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/derivatives). Minimum investment in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/derivatives)shall be 65 per cent of total assets. A dynamic bond debt mutual fund scheme is an open-ended dynamic debt scheme investing across duration. These are open-ended debt schemes investing in money market instruments having maturity up to one year.

• Fund managers can actively manage the allocation and adjust the portfolio composition based on market conditions and investment objectives.
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• The main goal of these funds is to generate regular income for investors through the interest earned on these fixed-income investments.
• Remember, before investing in any debt fund, it’s important to carefully review its investment objectives, risk profile, and past performance.
• In this blog, we’ll understand what debt mutual funds are, their benefits and types, how they work, and who should invest in them.

The following guide will explore what infrastructure debt is, its role in the global financial landscape, and why investors should consider it as part of a balanced and growth-focused portfolio strategy. Arbitrage funds capitalise on price inefficiencies in the cash and derivatives markets. The cash market, or the spot market, is where transactions are settled on the spot. In futures, an asset is sold at a future date at a predetermined price.

• These securities—such as bonds—are traded in the debt market, much like how stocks are traded on the stock market.
• They usually earn higher returns than liquid and ultra-short duration funds but also show more NAV fluctuations.
• These can include government bonds, corporate bonds, or even debentures.
• Long term debt funds are those funds that invest in debt securities for a long period of time, say more than 3 years.
• According to a recent news update as of May 2024, the private debt fund firms may expect the assets under management (AUM) to reach $2.7 trillion by 2028.
• The investors pool their money for a short period of time in instruments like commercial paper, treasury bills, certificate of deposits etc.

Debt Funds are a type of Mutual Fund that generate returns by lending your money to governments and companies. The lending duration and the type of borrower influence the risk level of a Debt Fund. Debt Funds are suitable for investment horizons ranging from 1 day to up to 3 years. If you stay invested for at least 3 years, they offer better post-tax returns compared to Fixed Deposits (FDs). Liquid Debt Funds are an excellent option for parking emergency funds, as they provide better returns than a savings bank account without incurring significant risk.

It is important to clarify that it is not issued by a particular entity. Consider attending events like NPL Days Hellas 2024, where experts discuss distressed debt markets and opportunities. Another type of security is a floating-rate loan or leveraged loan that is issued by non-investment-grade companies. These loans have a coupon rate that is floating above a common benchmark rate, such as the Secured Overnight Financing Rate (SOFR) in the US, plus a stated interest margin.

In this blog, we’ll understand what debt mutual funds are, their benefits and types, how they work, and who should invest in them. Changes made to the Budget 2023 suggest that a Specified Mutual Fund will no longer benefit from indexation when calculating long-term capital gains (LTCG). Debt mutual funds will thereafter be subject to taxation at the appropriate slab rates. By considering these factors and conducting thorough research, you can make more informed decisions when investing in debt mutual funds.

Infrastructure debt investors, in return, tend to be non-bank lenders who are interested in lending long-dated loans, often to match the interest income with long-term liabilities. While FDs are generally considered safer due to their fixed interest and deposit insurance, debt funds involve some risk due to credit risk and interest Rate Risk. The best way to avoid this risk is to invest in a debt fund that lends to highly rated corporates. Ratings assigned by credit agencies like CRISIL are a good indicator of the financial health of these companies.

How Debt Funds Are Different from Other Mutual Fund Schemes?

Among the major investment strategies, direct lending may take the largest stake of $900 billion. However, in the good case scenario, it could reach $1 trillion as well. The current economic environment supports private debt, with elevated central bank policy rates and low default rates. The floating-rate feature of private debt helps weather rate-hiking storms and diversifies portfolio risks. The origin of these debt funds started after the Global Recession crisis that occurred in 2008.

A balanced approach to these risks can help you select a fund that matches your risk tolerance​. The primary risks involved with such investment choices include interest rate risk, credit risk, and liquidity risk. Interest rate risk arises when changes in interest rates affect the value of the bonds in the fund’s portfolio; typically, bond prices fall when interest rates rise.