Debt mutual funds – an overview
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Mutual funds are known to be some of the easiest choices for investors who do not know how to pick the best securities to invest in. There are many types of mutual funds. Debt mutual fund is not a very popular one. But this one comes with a lot of perks that makes it a profitable pick to add to your portfolio. These funds work by using the investors’ money to offer loans or debts and then paying back from the interests that the debts offer.
How do they work?
When a lending agency offers money as a loan there would be an interest rate attached to it. This is the fee paid by the borrower to be able to use the lender’s funds for emergency expenses and for having the flexibility to repay it after a specific period of time instead of fulfilling the loan immediately. When mutual funds invest the capital from its investors in securities like Government securities or treasury bills the money here is used for clearing the debts or fulfilling expenses of the dependent parties. This is not like investing in an asset whose growth determines the change in the value. While investing in assets there is the condition that the asset value has to grow for the investor to be able to make profits. But with debt funds, there is the assurance that the investor would gain a little as the funds are put to use immediately. The fact that these work on the basis of the interests earned makes these funds predictable. The debt securities chosen for the particular mutual fund is predetermined. So before you make your investment you can get a fairly clear picture of the type of returns to expect. There are different types of securities available for debt funds. The ones which are low rated might be more volatile in most cases. Whether you wish to make a long-term deposit or a short-term one you would be able to find debt funds belonging to both the categories. There are also different types of debt funds and these are relatively less risky. So if you are an investor with traditional practices, one who doesn’t like to deviate much in either direction then these funds are great choices.