Debt funds: everything you need to know

Equity mutual funds buy stocks while debt funds buy debt fund securities as bonds for their portfolio. Securities such as bonds are issued by companies such as energy services, banks, housing financing and the government. They issue fixed-interest rate bonds to raise funds from the public (investors) instead of borrowing for new projects. Bonds are a promise to pay periodic fixed interest to investors who buy them.

When investors buy bonds with a maturity of a few years, they lend their money to the issuer (say ABC Power Ltd.) for those many years.

ABC promises to pay periodic interest to its investors during this period in exchange for the money they have invested in its bonds (=money loaned to ABC). ABC is the borrower as a customer taking a home loan. The investor (your mutual fund invests your money) is the ABC lender just as the bank is a lender for the home loan customer.

The debt fund
invests your money in a basket of bonds and other debt fund securities.

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