Investing money in debt instruments is considered more of an alternative investment avenue than investing money in managed funds and bonds. Like a mutual fund or exchange-traded fund (ETF), a debt fund is an investment pool. The core holdings of a debt fund comprise fixed-income investments such as short-term or long-term bonds, securitized products floating rate debt, or money market instruments.
There is a difference between equity and debt funds. Where the difference is basically where the money is invested. Debt funds invest in fixed-income securities. Equity funds invest in equity share and related securities.
Debt instruments are great places for investing money because of two reasons. One reason is the cost of debt is normally somewhere between 4% to 8%. The cost of equity if normally 25% or higher. Thus, debt instruments cost less to obtain. The second reason is safety. Debt is much safer than equity investment because there is much to fall back on if the company does not do well.
A debt investment is an investment in a firm through the purchase of a debt instrument as opposed to conventional equity investment in companies through buying common or preferred stock. Debt investments also include situations in which private investors finance debt products more commonly offered by banks or lenders.
Debt fund returns depend upon the overall interest rate movement. This means they generate moderate returns in the form of capital appreciation and regular income more than fixed deposits. A private debt fund does not invest in public markets like stocks. Rather, the fund manages a portfolio of loans which may be of various sizes and worth millions.
Investing money in debt instruments can be seen as a medium-range investment. The investment is longer than short-term investments, but shorter in length than long-term investments. Debt instruments reside within the alternative investment market. As with any investment, your best way forward is with professional guidance from a qualified financial advisor.
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