Types of Debt Investment


Since debt investments are less risky than equity investments and come with a regular payment, sometimes people end up making more money in debt investments than in equity investments but that doesn’t mean they are not associated with risk at all. Here are top 5 debt funds in India to invest in. 

All types of debt fund investments issued by Central government as well as State government make part of guilt funds. Since these investments are backed by government documents they come with zero default risk but are still associated with risks from other aspects such as changing interest rates. Long term guilt funds come with highest risk of interest rate. For people looking for capital appreciation instead of protection, guilt funds are the best. It is the underlying bonds that fluctuate wildly and are reflected in the fund’s NAV. 


Debt securities, such as commercial papers (CP), Certificate Of Deposits (CD) and bonds with a maturity of 3-6 month form part of short term funds. Since these investments are not affected by interest rate changes, returns are consistent. Also, they give slightly higher returns than liquid funds because the tenure of investment is longer. These funds are best suited for people who have surplus money and are looking to park it but want higher returns than from liquid funds. The ideal tenure for these funds is 6-12 months. 


Income funds have a flexibility to invest in terms investment tenure(1-2 years upto 15-20 years) as well as in a range of debt instruments such as bonds, corporate debentures and government securities. Aggressive calls are taken based on the outlook of the interest rate to earn profits from these funds. Someone who has a strong appetite for high risk should invest in these funds to gain from both rising and falling interest rates, though falling interest rates make ideal scenarios. 


As the name suggests these investments have a fixed tenure and invest in papers with matching maturity. Since they are held till maturity interest rate risk is taken away. The interest rate fluctuations does not affect the fund’s NAV. Returns from FMPs are predictable but not guaranteed. To park money for a fixed tenure in period of uncertain interest rates it is best suited to go for a FMP( Long-term FMP : 3-5 years for higher yields; short term FMP: 3-6 months to take advantage of a sudden hike in short term rates). 


Highly liquid money market instruments, such as treasury bills, inter bank money market, commercial papers, certificates of deposit, make part of Liquid Funds. These funds have the most stable returns amongst all other debt funds and have easy liquidity. In fact, they can be considered as a substitute of savings account to park the surplus money. Someone who has a lot of idle money and is looking to earn to more than what the bank offers, liquid funds are the best. They can be as short as a few days to a couple of months.