Welcome to the world of mutual funds. Since you have finally decided to invest in the so-called ‘safe and secure’ category of investment in the stock market, it is furthermore important to understand several avenues and opportunities.
While reading about the types of mutual funds, you come across a term quite often; the debt funds. What is a debt fund and is it worth putting money there?
Here is a brief guide for those who are new in the field and who want to grasp the concept quickly.
Debt funds earn by lending money
When we invest money in the debt fund, it generates returns by reinvesting the money in deposits and bonds.
A bond is nothing but a certificate of deposit issued by the borrower. When we open a Fixed Deposit in the bank, it is also kind of bond issued by the bank. In other words, these funds lend money to others and earn interest on it.
Debt funds can lend money to bonds that are not available to the individual investors. The interest received for this is distributed amongst the investors whose money is used for purchasing bonds.
Debt funds invest in tradable bonds in the debt market. The prices of tradable bonds increase or decrease just like the stock markets do.
Why debt funds earn good yields?
There are two reasons a debt fund can make big profits (which in turn is distributed to the investors).
Types of debt funds
Several categories of debt funds exist in the market:
Other than these prominent types, there are several other varieties such as dynamic bond fund and credit opportunity fund.
Debt funds are safe and reliable investments for those who want moderate returns with moderate risks.