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What are Debts and Incomes?
Debt funds are a type of mutual funds that generate income by lending out the invested money to governments and companies. These types of funds and their risk level totally depends on where the money is invested and for how long the money is invested i.e who the borrower is and what duration they borrowed for. Debt funds are financial investments in securities which help in generating fixed income. Treasury bills are common debt funds investments as well as corporate bonds, commercial papers, government securities, and other different market instruments. All these bonds and papers always have a maturity date that is decided from an earlier period of time with a pre – decided interest rate on which a buyer can earn maturity on. Thus, the following name, fixed-income securities. The returns on the debt funds aren’t really affected by the ups and downs in the market. So, debt funds are considered to be lower risk investment options for investors.
Types of Debt Funds
There are various types of Debt funds present in the market for the investors to choose from, the following types mentioned below are few important ones:
Money market fund – These types of funds have a maturity period of 1 year and help in investing for a short period of time.
Corporate bond funds – Corporate bonds funds are debt instruments that help in investing at least 80% of the assets in corporate bonds which have good ratings. These kinds of debt funds have lower risk.
Short duration fund – These are funds that are invested in such a way that their maturity is around one to three years.
Medium duration fund – The medium duration funds have a maturity period of three to four years and have the same features as short duration funds.
Long term funds – These are funds which are invested for more than seven years or so.
Liquid funds – These funds as the name suggests are high liquidity funds and usually have a maturity of 3 months.
Choosing the Best Debt Fund
There are different debt funds investors can choose from.Deciding on a fund can be confusing sometimes. So, here are a few scenarios to consider before selecting a debt fund.
- Objective of investment
Before choosing a debt fund, it needs to be decided what type of debt funds a person wants to invest in so that there is a clear picture of what needs to happen to the investment made. There are different types of debt funds mentioned above for reference. - Time period
Every debt fund has a maturity date set on it when it matures and is no longer an investment. Investors have to decide whether they want to invest on a long term, a medium or short term debt fund investment.The periods vary from 3 months to 7 years. - Risk
Debt funds also have specific risks associated with it which are credit and interest rate risk. Credit risk happens when the manager who manages funds invests the money in securities that show a lower rating of growth or return. This leads to a higher chance of wrong return and defaults. In case of interest rate, bond prices may decrease, and when the interest rate rises it leads to poor returns on your investment. That is one of the reasons why it is important to check the information on securities before investing.It is also important to see a fund manager’s performance in past trading scenarios before giving them the access to make investments..
What do you mean by Debt Mutual Funds?
Debt is a major financial instrument market in which people tend to invest their money to earn profits. The debt market has lots of financial instruments which help in facilitating the buying and selling of loans for an exchange which ends with interest money on the loan paid. The debt funds are considered to be less volatile and risky compared to equity investments,so investors who may not like taking higher risk investment chances choose to opt for the debt funds . The debt fund investments offer much lower returns as compared to the equity investments.
What are Income Funds?
Income funds are funds that focus on a current perspective of income rather than major gains in capitals and investments. Income funds are looked after for monthly or quarterly changes. These funds rise when the interest rates start decreasing and if the interest rate is high the funds start to fall.
Income funds in ICICI
As mentioned on the official ICICI site, their income funds main objective is to better the investments made on fixed income securities and increase the profit earned while maintaining a balance between liquidity, safety and return. The following link gives you information about the income funds in ICICI.
Monthly Income Mutual Fund
These types of income funds are also called Monthly Income Plans(MIP). These are a type of mutual fund that help in income from investments in form of dividends or interest payments. These funds are usually invested in the debt and equity scenarios. Investors in MIP usually have the advantage of liquidity while enjoying a regular flow of dividends. Monthly income plans are not securities that generate steady monthly incomes like the name suggests. Its like any other market investment tool where dividends are paid based on the profits generated.
Conclusion
The above article discusses in detail about what debt and incomes are along with their types. The article speaks about how debt and income funds are different but similar in nature because of their end objective that is generating income from investment in securities.
