What is a Debt Fund?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 May 2020
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A debt fund is a type of investment pool that makes use of a set of core holdings that provide a source of fixed income. Just about any type of fixed rate income can be utilized within this type of fund, including securitized products and various types of money market instruments. With this sort of investment strategy, the investor is able to create a resource in which the original capital investment is solid and the opportunity for a steady generation of return is increased.

Two of the more common examples of a debt fund are the exchange-traded fund and the mutual fund. Both of these fund types are relatively easy to establish, and are also somewhat simple to manage. In order for the strategy to have the highest potential for success, the fund will include a combination of different types of financial instruments, with each one providing a fixed return. For example, the debt fund may include both short-term and long-term bonds that are structured with fixed interest rates. Along with the bond issues, the fund may also include investments in money markets where the return is easily projected and the degree of risk is somewhat low.

One of the benefits of a debt fund approach is that the fee ratio is usually lower than with other types of investment strategies, such as equity funds. Since the focus is more on the return generated, the short-term performance of the debt instruments contained within the fund are secondary in importance. Assuming the right combination of investments are included in the fund, the possibility of absolute return is enhanced, and the pool of investments stands a good chance of generating that steady return over the long-term, with relatively little changes to the core group of assets.

Since the nature of a debt fund is to include investments that are structured to provide some sort of fixed return, it is much easier to project the anticipated amount of profit that will be earned in any given time period. Periodically evaluating the most recent period and comparing its performance to the previous one or two periods can often help identify if any one of the core investments needs to be replaced with something that shows more promise. Taking the time to assess the overall performance of the fund and making trades when and as necessary will help keep the return on the fund at consistent levels, and thus provide a measure of financial security for the investor.

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