Debt is a term we’re all pretty familiar with, but do you know what a debt fund is? We want to lay it all out for you. What a debt fund is, how it works, and why it’s important to diversify with this kind of fund.
What Is a Debt Fund?
Debt funds, sometimes referred to as bond funds, credit funds, or fixed-income funds, are funds that specifically invest in bonds, debt securities, money market instruments, or floating rate debt. Essentially, a debt fund is a fund made up of investments that are backed by debt.
These funds are pooled investments and are relatively stable and considered less volatile than other methods of investing.
How Does a Debt Fund Work?
The best way to describe this is to think of bonds. Bonds are investments that act as loans for borrowers (both corporate and government). The investor’s capital is the loan that these borrowers use. Thus, a bond is essentially an investment in the debt of a corporation or government entity. The interest made on the investment is actually the interest paid on the loan.
Debt funds have their own debt market, much like the stock market, and can be traded accordingly. Consider a loan that is charging 9% interest, the economy shifts, and the same loan is now offered at 8% to borrowers. However, the 9% loans haven’t been paid off, so they’re actually generating more returns for investors and are thus worth more.
Bonds are unlike stocks, which are a portion of ownership share in a corporation or company. Because bonds, and other forms of debt funds, are directly related to a loan, the investment has to be paid back in nearly all cases, making these kinds of investments more secure.
This doesn’t mean that diversification isn’t still important. Even with a lower risk fund, it is essential to diversify for the best growth to risk ratio and to protect your investment.
How MICs Relate to Debt Funds
We’ve established that debt funds are also thought of as fixed-income funds. MICs offer mortgage pools, which are themselves a type of alternative fixed-income fund.
Borrowers who do not qualify for traditional mortgages through financial institutions turn to MICs to fund their developments. In turn, investors can invest in these mortgages — or a kind of debt.
MICs are an alternative debt fund that allows investors to invest in real estate more securely through a pooled fixed-income fund.
At Cooper Pacific, we’ve been helping investors to diversify their portfolios and protect their investments through quality mortgage pool investments for over 20 years. If you’re looking for an alternative way to diversify your investment portfolio without taking on unnecessary risks, get in touch with Jordan.