What is a Bond (BOND)?
Mostly, bonds represent debt obligations – and therefore a form of lending. If a company issues a bond, the money they receive in return is a loan, and must be repaid on time. Like a mortgage on a home or credit card payment, the bond payment also meets the periodic interest the lenders have to pay. Bond buyers are then essentially lenders. For example, if you have ever bought a government bond, the central government has become your debtor.
A bond is like a certificate of deposit that is issued by the borrower to the lender. Even individual investors do something similar when they make a fixed deposit in the bank. When you make a fixed deposit with a bank, you basically lend money to the bank. You can also buy bonds, for example tax-exempt bonds issued by various companies such as REC and HUDCO.
What is a debt (DEBT) fund?
Bond is called Debt in market language, it is the same thing and you should not be confused with them.
Debt fund is a type of mutual fund that generates returns from its investors’ money by investing in various types of bonds or deposits. These words basically mean that they lend money and earn interest on the money they lend. This interest that they earn forms the basis of returns for the investors.
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A simple way to understand debt funds is to think of them as a way of passing through the interest income they derive from the bonds they invest. There are some complications ahead of it.
Unlike FDs, individuals who invest, mutual funds invest in bonds that are tradable, such as shares that are tradable. Just as there is a stock market where shares are traded, there is also a bond market where various types of bonds are traded.
Two, on this debt market, the prices of various bonds may rise or fall, just as they do on the stock markets. If a mutual fund buys a bond and its price rises later, it can make the excess money more than the additional interest and income. This will give investors more profits, but obviously the opposite is also true.
But why will bond prices rise or fall? There can be many reasons for this. The major one is a change in interest rates, or even the expectation of such a change. Suppose there is a bond that pays interest at the rate of 9 per cent per year. Then, interest rates fall in the economy and new bonds begin to meet at 8 per cent. Obviously, the price of old bonds should now be higher than before. After all, investing a given amount in it can earn more money, so its value will now increase.
Mutual funds that hold it will have a higher holding value and can earn additional profits by selling this bond. When interest rates rise, the reverse can happen. Despite the expectation of protection, such a situation may actually cause some losses for bond funds.
Well, we have understood what a debt fund is and to invest in it you just have to trust that fund manager and you can earn good returns. But how to invest in such debt funds?
It is very easy, first study which debt fund you want to invest in and if it is beyond your comprehension then you can also go to any advisor. The rest of the process is equivalent to investing in an equity fund and you will get all the benefits like no full public in-house and facility to sell anytime.
Basic process to invest
It is also possible to do SIP in debt funds and most of the benefits of equity funds will also be available here.
Greatest mantra
Debt funds have lower risk because they work with loan guarantees. Since the risk from equity is less, hence the returns here will be less and it is futile to expect returns above 10% at low risk.
