Debt Fund - the way out

Hello people, I had created a poll last time, asking you about various 'risk free' yet 'yields oriented' ways of investment you know about. One of the opinions (infact the only opinion :( ) was to invest in Gold. Well my dear friend, Gold in these days is also not an attractive investment option. With economy on the path to recovery, more and more funds are being shifted to equities from gold, hence eventually gold prices are subject to fall in coming months (Disclaimer:This is an entirely personal though point).

Their is another option you can consider. Its called a debt fund. Lets know more about it.
A Debt Fund is a type of mutual fund that whose core holdings are fixed income investments such as short-term or long-term bonds, securitized products, money market instruments or floating rate debt.

Bonds? Secuirities??? blah, blah..didnt get a word. Well dont worry, we will try to make it as crystal clear as possible.
Securities are usually a government debt obligation (local or national) backed by the credit and taxing power of a country with very little risk of default. This includes short-term Treasury bills, medium-term Treasury notes, and long-term Treasury bonds. While bonds or debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment. An example of a government debenture would be any government-issued Treasury bond (T-bond).

In short, just like fixed deposits are considered a safe way of investment and based on the belief that the bank will be able to pay back the amount when needed, similarly debt funds are funds which invest in instruments which have very low chances of defaulting, and at the same time, they are aimed at increasing the invested amount. The main investing objectives of a debt fund will usually be preservation of capital and generation of income. So how do these debt funds provide increased returns?

Debt funds buy debt instruments at a certain price and then sell them. The difference between the cost and sale price accounts for the appreciation or depreciation in the fund’s value.

A debt instrument’s market price depends on the interest rates of its underlying assets and also on any upgrade or downgrade in the credit rating of its holdings. Market prices of debt securities swing with movements in interest rates. Let’s assume your debt fund owns a security that yields 10 per cent interest. If interest rates in the economy fall, new instruments that hit the market would reflect the changed interest rate scenario and offer lower interest rates. This would result in an increase in your fund’s instrument’s price as the higher yield would raise the instrument’s value. As a result of the increase in the debt instrument’s value, your fund’s NAV would also rise.

Also, Similar to the interest that a bank fixed deposit gives during its tenure, debt funds also earn a regular interest from the fixed income securities that they are invested in.

This income gets added to a debt fund on a daily basis. If the interest comes, say, once a year, it is divided by 365, and the debt fund’s NAV goes up daily by this amount.

Ok, their was enough technical jargon here. But did you understand anything?


Source of information
http://www.investopedia.com/terms/d/debenture.asp
http://www.outlookmoney.com/article.aspx?91628

1 comment

File Personal Bankruptcy said...

yeah that's right investing in gold is not a good deal in these days,share market is also not stable,so important is to keep money in hand and wait for right time to come.

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