Debt Funds invest their investors’ money in interest-bearing securities like bonds, corporate deposits, G-secs, money market instruments, etc. These bonds are like certificates that carry an obligation on the part of the bond issuer to pay regular interests (coupons) to the bond investors. Thus, debt funds earn regular interest income from such securities held in their portfolio. The interest earned by a debt fund from its bond portfolio can either be distributed among investors or accrued to the fund i.e. added to the fund assets, leading to an increase in NAV. Thus, unlike equity funds which depend on divided distribution from their portfolio of stocks, debt funds have a regular interest income, from the underlying portfolio, built into their features.
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