The character of debt funds is often undermined by the euphoria over the performance of equities, driven by the news and excitement around the stock markets. A fundamental basis of constructing an investment portfolio is asset allocation, which entails a mix of both equity and debt assets. Debt as an asset class is more oriented towards income as opposed to equity which is oriented towards growth. There is a role for debt funds in an investment portfolio and that shouldn’t be undermined.

A debt fund is a mutual fund scheme that invests in fixed income instruments, such as bonds, corporate debt securities and money market instruments, which are less volatile compared to equities. Such attributes make investments in debt funds suitable for short- to mid-term goals and for investors who want regular income and prefer low risk and less volatile investments.

Another reason to consider debt funds is their behaviour; unlike equities, which are volatile, investment in debt, tends to be less volatile in terms of day-to-day fluctuations in price. All these traits make investment in debt funds complimentary to equities, which make a suitable combination to achieve the right mix of asset allocation. How much you wish to allocate to debt funds in your portfolio is governed by your priority for income and potential stability over growth in your investment portfolio, along with the risk that you can take with your investments.

Inside the debt fund
Just the way equity investments provide you with dividends, investment in debt instruments earns you interest. For instance, in case of investment in a bond, which is like a certificate of deposit that is issued by the borrower to the lender; there are three main features to know about – coupon, par value and maturity, which collectively define cash flows of the bond and timing of these cash flows.

The coupon is the promised interest rate paid at a fixed interval to bondholders; the par value is the principal sum that is returned by an issuer to a bondholder at maturity and lastly maturity, which is the date on which the bond matures assuming all promised payments are paid.

Debt funds also come with specific risks like credit default risk and interest-rate risk. Credit default risk occurs when the fund manager invests in securities that have low credit rating, which could result in a higher probability of default. In case of interest-rate risk, bond prices could fall when interest rates go up, leading to lower returns on your investment. This is attributed to the inverse relationship between bond prices and interest rates.

On the whole, there is a wide choice in the bouquet of debt fund with 16 different types of debt funds based on the Securities Exchange Board of India (SEBI) guidelines. These can be classified based on their indicative investment horizon and investment strategy. You can choose a debt fund based on the time horizon, liquidity needs and your risk appetite. You could select a debt fund category based on your investment need and requirement.

Different funds for different goals

Disclaimers:

CRAMC has used information that is publicly available, and information developed in-house. The information gathered and material used above is believed to be from reliable sources. CRAMC however does not warrant the accuracy, reasonableness and/or completeness of any such information. While utmost care has been exercised while preparing this, CRAMC does not warrant the completeness or guarantee that the achieved computations are flawless and/or accurate and disclaims all liabilities, losses and damages arising out of the use or in respect of anything done in reliance of the above. The examples do not purport to represent the performance of any security or investments. In view of individual nature of tax consequences, each investor is advised to consult his/ her own professional tax advisor before taking any investment decision. The calculation shown, if any, are just examples and are only for illustration purposes, purely to explain the various concepts which are covered in the above. Please note the figures assumed above, if any, are purely for illustration purposes only & shall not be construed as indicative yields/returns of any of the Schemes of Canara Robeco Mutual Fund.