Debt mutual funds invest in debt instruments/securities like bonds (corporate and Government), money market instruments, treasury bills etc.
Simply put, when you invest in a debt instrument, you are lending money to a corporate or the Government directly. In return, they issue a security which generally has a fixed coupon (interest rate). These securities
are traded in the debt market, similar to how stocks are traded in the stock market. These are the securities debt funds invest in. Each security like a bond comes with a coupon rate, face value and maturity period. For example,
a company can issue bonds of face value Rs 100, at a coupon rate of 6% for a maturity period of 5 years. Till 5 years, you will get 6% returns annually, and at the end of 5 years, you will get your principal amount back.
You may wonder, how safe are debt funds? Well, debt mutual funds are not risk-free. Any investment that is entirely risk-free may not have the potential to generate higher than nominal returns- that is the risk-return
trade-off. But debt mutual funds are relatively safer than equity mutual funds. If you are a risk-averse investor wanting to get better returns than the traditional saving instruments with lower volatility, then debt funds may
help you. The best debt funds for you will depend on the goals that you wish to achieve with them. Click here to know more about how to link your debt funds to your life goals.