People opt to make mutual fund investments with an eye on long-term wealth accumulation. While long-term wealth creation is a common goal different investors will have different numerical values in their minds. One investor might aim to acquire at least ₹2 crores at the time of retirement, another might have a goal of ₹3 crores. Therefore, just opting for an investment scheme isn’t enough, you need to select the right variant from the different types of mutual funds that are available in the market. Apart from selecting the right variant, you also need to determine the investment objective, type of investment, and the type of goal.
There are two types of investment options when it comes to mutual funds. One is through a SIP investment plan when a certain sum is deducted from your bank account every month. Another is a lumpsum investment, where the investment money is paid in one go. After deciding on the type of investment option, you need to determine the type of goal.
The types of goals here in the world of investments can be categorized into three. They are long-term, mid-term, and short-term goals. While many already know that their equity and debt fund investments are useful for long-term purposes, what they might not be aware of is that some mutual funds, especially debt funds, and their variants are useful for mid-term goals too. Read below to know not only what debt funds are but also which variants you can opt for to achieve mid-term goals.
What is the definition of debt funds?
This type of mutual fund is known for chiefly investing the investor’s money in debt and money market instruments. Things like treasury bills (T-Bills), certificates of deposits (CDs), and commercial papers (CPs) are targets of investment in a debt fund. The reason why you should consider investing in things like debt or money market instruments is to get a chance to enjoy income in form of interest payments.
But the factor that differentiates debt funds from equity ones is that debt mutual funds come with considerably lesser risks than equity funds. Furthermore, there are several variants of debt funds that can help you invest even for one day to many years. For example, overnight funds invest in instruments that mature overnight. Liquid funds allocate funds in securities that mature in less than 91 days.
What type of debt fund investment will help in achieving mid-term goals?
Different types of debt funds can help investors in reaching different types of goals. Listed below are some of the debt fund variations that will be helpful for you in achieving mid-term goals:
- Short duration funds:
This type of debt fund is known for investing in money market securities and debt in such a way that the duration of the portfolio spans between 1 and 3 years. One of the reasons why one should consider FDs is that they are known for offering tax-efficient returns to the investor. Moreover, in case the fund is redeemed after holding it for more than 3 years, thanks to indexation, lower taxes may be levied on the investor.
- Banking and PSU funds:
These funds are debt fund schemes that are known for investing in debt and money market instruments that are issued by financial entities such as public financial institutions or PFIs, public sector undertakings or PSUs, and banks. By SEBI’s mutual fund classification guidelines, a banking and PSU fund should invest nearly 80% of its assets in instruments belonging to the financial entities. Investors seeking debt fund investment options with good credit quality can opt for banking and PSU funds.
- Corporate bond funds:
These funds are known for being the debt mutual fund schemes that allocate approximately 80% of their assets to well-known companies. This makes them a relatively stable variant of debt funds. Mostly, they invest in corporate bonds that have a rating of AA+ and above or non-convertible debentures. As corporate bond funds allocate funds to high-rated debt securities, the credit risk is regarded to be low. However, these funds may be subjected to interest rate risks, which are dependent on the duration profiles.
Each of these types of debt mutual funds is known for coming with the required balance between revenue and risk if your investment objective is to achieve your mid-term goals.