Debt funds are generally overlooked by investors, as they yield lesser returns than equities. But when it comes to fixed-income securities, debt funds take the cake home.
Debt funds invest in securities like treasury bills, corporate bonds, government securities, commercial paper and other money market instruments, providing investors with a pre-decided return at maturity.
A balanced investment portfolio is imperative for achieving both long-term and short-term goals. With the right balance between risks and returns, you can strike gold.
Debt funds are exposed to fewer risks than any other mutual fund investment. The major risks associated with Debt funds are credit risk and interest rate risk, which diminish to a large extent if held for more than 3 years.
Today, when mutual funds in India are catching the fancy of both big and small investors, it only makes sense to learn what flies when nothing does. So, here are 5 reasons why you should invest in debt mutual funds:
Diversification
A balanced portfolio is like the best of both worlds, some fixed, albeit lesser, returns and others leaning on more risk and expecting higher returns. As debt funds aren’t as volatile as equity funds and the stock market, they tend to reduce the overall portfolio risk. Even if something were to go wrong, the investor will always have a cushion to break the fall.
High liquidity
Emergencies don’t knock. This is especially true for financial ones. If an urgent need for money arises at any given point of time, your investments should be able to support you. Instead of letting yourself break the bank and wipe off the savings, invest in debt funds today. They offer high liquidity and are an ideal emergency reserve.
Regular income
Offering fixed, regular returns is something that debt funds are famous for. Once matured, the returns can be paid out as dividends over a period of time.
Another way to gain something from debt funds is to choose SWP or systematic withdrawal plan. Technically, it is the opposite of SIP. SWP allows you to withdraw a fixed sum from the larger investment at fixed intervals.
Predictable returns
For short-term financial objectives, debt mutual funds are ideal to invest in. They are not as volatile as other funds are, and the returns are predictable. Any short-term debt fund investment, say for a year or two, can yield great returns.
Less risky
The current inflation rate is around 4-5% while the current returns from debt funds are reaped at a rate of 7-8%. Debt funds are a good way of beating back inflation, especially when compared to the volatility-surrounding equity funds. There isn’t anyone to say if short-term equity investments will pan out or not, but a decent short-term debt fund, more often than not, does.
Types of Debt Funds
There are several types of debt funds to choose from:
Gilt Funds
They invest in government securities only. They are ideal for risk-averse investors who are looking for fixed income investments.
Income Funds
They usually have a long maturity period (around 5 – 6 years) and are more stable than dynamic bond funds.
Fixed Maturity Plans
These are closed-end debt funds. However, the investments can be made only in the initial offer period. They are more like an FD that can deliver better returns. However, these returns aren’t guaranteed. Also, they have a lock-in period but are very tax-efficient.
Dynamic Bond Funds
Dynamic bond funds don’t have a fixed maturity and their maturity keeps fluctuating. This is because they invest and reap interests from both long-term and short-term investments. Also, portfolio composition is changed in accordance with the interest rate regime.
Short-Term and Ultra Short-Term Debt Funds
These particular types of debt funds have shorter maturity periods, which range from 1 to 3 years. They are perfect for conservative investors for they remain relatively stable even during interest rate movements.
Liquid Funds
Almost risk-free investment instrument, liquid funds have a maximum maturity period of 91 days. They provide liquidity similar to that of a bank account but offer much higher returns.
Credit Opportunities Funds
These are relatively newer debt funds. These funds take a call on credit risks and hold lower-rated bonds with higher interest rates to reap profits. However, they are relatively more volatile.
Final Word!
Debt funds have the potential to yield superior, tax-adjusted returns when compared with most fixed income securities. Investors above the 20% income tax slab should specially give it a deep thought.
So, if you feel that your financial goals are nearly fulfilled, it is better to invest in debt funds. After all, assured returns have their own perks.