A mutual fund is a professionally managed company that collects the money of many investors and invests it in securities such as stocks, bonds and short-term debts, equity or bond funds, and money market funds.
Mutual funds are a good investment for investors who want to diversify their portfolio. Instead of focusing everything on one company or sector, a mutual fund invests in different securities to try to minimize portfolio risk
.
Debt funds invest the money aggregated by investors in bonds issued by banks, PSUs, PFIs (public financial institutions), companies and government. These ties are usually of a medium to long term nature. When a mutual fund invests in such bonds, it earns periodic interest from these bonds that contribute to the fund’s total return
over time.
Some debt funds also invest in money market instruments such as T-invoices issued by the government, commercial documents, certificates of deposit, bankers’ acceptance, bills of exchange, etc. which are more short-term in nature. These instruments also promise to make fixed interest payments at regular intervals that contribute to the fund’s overall return over
time.
While both bonds and money market instruments promise their investors, that is, your mutual fund, to make regular interest payments in the future, they may not meet these obligations under certain circumstances such as financial difficulties. So, while debt funds are considered more stable than equity funds, they still involve some risk because these issuers may not make timely payments that constitute a significant part of
the fund’s total return.