Debt Investment

If you are starting your investment journey you might hear that ‘never put all your eggs in one basket’ which means you should diversify your portfolio. The young investor has much risk-taking capacity so they, generally, heard about equity investment but, is there any other option that can also grow money with low risk? Yes, you can explore Debt Investment. Let’s explore it. 

What are Bonds?

A company whenever needs money it can be taken by giving by sharing its equity or by issuing bonds. Companies issue bonds and ask investors to lend them money, in return for which the company promises to pay a fixed interest to the lender. Even if the stock market goes down the company will give that fixed interest. These interests are more than FD but the interest you get will be lower than the equity market. One more point that is to be noted is that investing in bonds there is a fixed amount you have to pay that is known as the face value of the bond, investor can invest in multiple of these but the minimum they have to pay is the face value. 

Like FD in bonds also there is a fixed period for which the bond is issued it may be of 1 year, 2 years, or 5 years, etc. Bonds can be of different types Gold bonds, Public sector bonds, and many more. But why bonds are not so famous ? the answer is, the risk involved in bonds, firstly, credit risk, suppose you lend money to a company but after the sometimes company goes bankrupt. This situation can be dealt with easily, many credit rating agencies are running in the country, and these agencies rate the bonds as the higher the rating lower the chance of default. 

Secondly, Liquidity Risk, after investing in a bond, over a certain period you want your money back but the company directly can’t give you money back. The company wants another lender who will lend money for the rest period. Thirdly, Interest Rate Risk, when the company is trying to find another lender for that bond there might be a scenario that, some other company is given the same bond with a higher rate of interest. In this case, there will be no one to buy your bond.

Debt Funds:

After having a good idea of the bonds you are ready to know about debt funds. Like equity mutual funds, there is a debt mutual funds also which take money from you and invest in different bonds. Debt funds are less volatile but the return is less. So, the money which you don’t want to take a risks with it should be kept in bonds. Debt Funds can be used when you get some unexpected cash, it may be from a bonus, gift, lottery, etc., or when are not prepared to put that money in stock, in crypto than then to keep money safe unless you planned something for that money it can be kept in debt funds. Also, the equity market is a long-term term investment so debt funds can be looked short-term term investments. 

Type of Debt Funds:

• Gilt Funds: These funds invest only in government bonds where credit risk is zero.
• Credit Risk Funds: These funds invest by looking at the opportunity.
• Banking &PSU Funds: These bonds have credit risk zero as they invest in government schemes.
• Dynamic Funds: In this fund, the fund manager can choose when to take a short-term bond or long-term bond based on the interest rate.

Conclusion:

With the final words on debt investment, In layman’s language, you can also make debt investment by lending a loan to your local vegetable shop and getting free vegetables as the interest for some time. The point to be noted here is investing in bonds directly is not easy as multi parameters are to be checked and not every time bonds are available in the market, also if you want to invest for more than 5 years then equity funds will be betters option as there is a chance of getting high returns. Like index funds, as they set a benchmark for the equity market, there is no index debt fund available.