Debt Funds - Understanding the Benefits

When a number of small investors pool their money together and invest it in various investment avenues it becomes a Mutual Fund. Such a fund allows small investors the safety and security of investing with other similar small players. A mutual fund has a team of expert market analysts that study the market before making any investment decisions for the fund. Thus the individual investor benefits from the expertise of the analysts.

When such a mutual fund invests solely in fixed income investments it is called a Debt Fund. The main objective of such a fund is capital protection for the investors in the fund. It is seen as relatively safer than the investments in stocks through either a mutual fund, or direct exposure to stock markets.

Such funds can be classified in terms of the duration of the investment as either short term or long term funds. The other classification can be done on the basis of the asset class into which the fund invests its corpus. The first asset class refers to corporate issues of bond papers. The issuing company undertakes the liability of timely repayment of the bond. The risk is only limited to the ability of that particular company making good its liability. The second refers to the bonds that are issued by the Government. This is the safest option for the fund, but the yield for the same is low. The third, refers to the municipal bonds that are issued by the local municipalities for the development projects undertaken in its jurisdiction. Such bonds have a better yield than the government bonds and are preferred by the funds.

These funds are preferred by investors who are averse to risks. This could be because the monies invested are the realization from other instruments and are hence to be preserved. It could also be due to the fact that the investor profile has changed over time. For someone who is about to retire, preservation of capital created over a lifetime may seem like a more important goal than the growth of the capital.

There are several reasons why investors prefer such fund options to direct investment in the bonds. First of all, the bonds allow flexibility in terms of tenure. While an investor has to stay invested in an individual fixed income instrument, a unit in a bond can be liquidated at any time. Secondly, the fund is managed by professionals and hence is a more secure investment. Thirdly, the fund invests in a number of instruments thus reducing risk even further. These funds are hence very popular with investors and there are a number of options available for the investor to choose from.