Home Investments Other Invesments What are Debt Funds?

What are Debt Funds?

Debt funds

Debt funds are a type of investment funds that invest in fixed income earning investments like Government bonds, treasury bills, etc. Individuals who prefer, highly safe investments, where loss is minimal choose debt fund deposits. They differ from mutual fund by providing safer investment options as investments are made on fixed income earning entities, unlike mutual funds where investments are made in the stock markets.

How Debt funds work?

Here the capital is invested in bonds of fixed income earning entities and the income is generated from the interest obtained from these investments. These bonds are tradable just like shares in a share market. Hence a bond market exists where the bonds are traded between various investors of debt funds. In this bond market the prices of various bonds may vary. By selling bonds, additional money is gained other the usual interest, as a result of the subsequent rise in price. The major reason for rise in price is the change in interest rate.

Benefits of debt funds

The investments can be withdrawn at any moment.
With a change in interest rates, debt funds can give higher returns.
In debt fund, the tax is carried over indefinitely until the investor makes redemption on his unit. Thus, debt funds prove to be more tax efficient.
Also in debt funds, the investments keep on growing until the redemption is made.

Partial withdrawals can be made without disturbing the entire investment