Debt funds are mutual funds that invest in fixed-income securities issued by the Government and other private companies. They include:
The most common types of debt mutual funds are the following:
General debt funds: These are mutual funds that invest in both Government debt instruments as well as private ones, and for varying time periods.
Gilt funds: These invest only in Government securities. Since it is highly unlikely that the Government will default on the loans it takes, they come with very low risk.
liquid funds: These funds are considered to involve the least risk and very rarely see negative returns. They invest in debt instruments that mature within 91 days.
dynamic bond funds: Depending on changing interest rates, dynamic bond funds change their investment portfolio. These funds invest in debt instruments of both short-term as well as long-term maturities.
income funds: These are relatively more stable as they invest in securities which have a longer maturity period, say 5-6 years.
The prices of fixed income securities are inversely proportional to interest rates. So, when the interest rates go up, bond prices go down. Similarly, when the interest rates are low, bond prices are high. Debt funds are considered to be a good alternative to fixed deposits, as they can be redeemed at any time and are more tax-efficient.