Risks Associated With Debt Funds

Risks Associated With Debt Funds

Debt funds are considered generally safe when compared to the equity funds as they invest primarily in risk-free corporate and government bonds. However, they are not risk-free 100%. Trading in currencies and cryptocurrencies are very much riskier when compared to investing in debt funds as the market they operate in is highly volatile. But the return one can earn from these securities is quite high. You need to have the excellent knowledge of the market and the economic trend to take a wise decision with regard to the transactions to be conducted in these markets.   If you are not knowledgeable enough, then you could take the help of auto-robots like bitcoin trader to conduct the trading transactions.

As mentioned debt funds also carry some risk element and listed below are few of them.

Interest rate risk- The interest rate risk could be defined as the risk that is emerging from the adverse change in the interest rate that is currently prevalent in the market which will affect the yield of all the existing instruments.  A good example would be a scenario where the prevailing interest rate would experience an upswing leading to the situation wherein the people who invested the funds at lower rates would have earned much more if he waited and invested after the change in interest rate.

Default risk- This risk arises when then issuer of the bond is unable to make the payment on time of principal or interest or unable to comply with the provisions mentioned in the bond indenture.

Counterparty risk- This risk is normally associated with those transactions when the opposite party fails to deliver the promised security or sale-value during the settlement time.

Reinvestment rate risk- This risk arises when there is a probability of fall in the rate of interest which results in a lack of different options to invest interest received.

Price risk- Price risk arises when there is an adverse movement of prices and you do not receive the expected price.

There is risk involved in all matters related to money but the risk rate differs from each investment to other. Hence when you make an investment you need to first analyze your tolerance to risk level. If you don’t mind taking up high risk, then you can invest in those funds which are high in risk and gives you a good yield. But if you are not tolerant of risk, then invest in low-risk funds but be prepared to earn a lower amount as a return.