How debt funds can help you create a steady income stream

financialexpress.com:

A debt fund invests in various instruments – namely, government securities, bank certificate of deposits (CD), commercial paper (CP) issued by corporates and debentures/bonds. While all these instruments may differ in some aspects, there is one thing in common among all debt instruments – they all carry interest.

This interest rate is pre-decided at the time of investment and the interest component will not change during the course of the debt outstanding. The maturity value of debt instruments is also known at the time of the investment and the investor can be certain to receive this sum as a repayment of the principal invested. This is why the terminology “Fixed Income” is used for this asset class.

* Unlike in equity where returns are largely dependent on price movement of the underlying shares, returns from fixed income are significantly attributable to the yield of the portfolio. There can be fluctuation in portfolio value during the course of the investment but they will yield a pre-determined return if held till maturity. This makes them a great investment for predictable and regular income as well as providing stability to a portfolio when other asset classes underperform.

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* Inclusion of fixed income reduces the volatility of the portfolio as well as adds an income component to the portfolio. It is for this reason that fixed income as an asset class appeals to pension funds. As an example of the prevalence of fixed-income securities in pension portfolios, the largest pension plan in the U.S., the California Public Employees’ Retirement System (“CalPERS”)has one-third of its $385.1 billion portfolio allocated to fixed-income investments