Debt fund is a pool of investment such as exchange traded fund or mutual fund, in which primary holdings are based on fixed income investment. The debt fund may be invested in long or short term bonds, money market instrument, treasury bills, security product, government securities, and floating rate debt. Generally, it has fixed date of maturity and interest rate.
Explanation of Debt Fund
Primarily, the investing objective of a debt fund is to preserve the capital and generate the income. Debt funds are preferred by those individuals who are not willing to make an investment in the highly volatile equity market. A debt fund ensures stable but low income as compared to equity, and it is comparatively less volatile. Furthermore, a credit rating is also assigned to debt fund in order to make an assessment of the ability of the issuer of the bonds/securities to pay back their debt over a specific period of time
A debt fund carries negligible risk and some charges are included with it, but it emerges as an effective product of investment for those who want low risk investment. Debt funds are tax efficient, hence, people in a higher tax bracket may consider debt fund as another investment source for fixed income.