Young
investors are willing to take the added risk and risky investment decisions
since most of them do not have any serious responsibilities. Taking a risk when
you are young can be good because you have more years in hand to correct your
investments even if you face losses in the early stages. While taking risks can
be rewarding, investors must diversify their investment portfolios across asset
classes. Equity as an asset class may be rewarding but it may not continue to
generate positive returns all the time. Hence it is better to add various
investments to your investment portfolio so that even if one asset
underperforms, other asset class investments can safeguard the overall
portfolio.

Investors
with an equity heavy portfolio can consider investing in debt mutual
funds.
What are debt funds?
While
equity funds aim to generate long term wealth by predominantly investing in
equity and equity related instruments, debt mutual funds are those funds that
invest in money market instruments and fixed income securities to generate
stable returns whilst protecting the investor’s invested capital. There are
currently 16 different debt mutual funds that investors can choose depending on
their investment objective and investment needs.
What are some of the primary benefits of investing in debt
funds?
Try
to generate stable returns
Equity
funds have a risk returns tradeoff which means that although they can give high
returns, there are higher risks involved. That’s because the equity market is
highly volatile in nature and fluctuates on a regular basis. However, this
fluctuation doesn’t bother the portfolio of debt fund as it invests in fixed
income securities and money market instruments like commercial papers,
government bonds, treasury bills, certificate of deposits, CBLO, reverse repo,
cash, and cash equivalents, etc. Thus, by invest in fixed income generating
debt instruments, a debt fund tries to generate stable returns.
Offers
cushion against volatility
It
is less likely for all asset classes to perform in tandem all at once. Equity
and debt asset class have an inverse relation. Whenever equity markets are
performing, debt investments may not deliver. However, whenever there is a
market crash, your investments in a debt fund can act as a hedge against market
volatility provide stability to your portfolio.
Debt
funds offer immense liquidity
One
of the drawbacks of investing in some equity funds like ELSS (Equity Linked
Savings Scheme) is that it comes with a predetermined lock-in period of three
years. This might hamper an investor’s portfolio liquidity. However, debt funds
like liquid funds offer high liquidity that allows investors to redeem their
units and receive the sum equivalent in their registered savings account almost
instantly. This is one of the reasons why a lot of investors consider debt
funds like liquid funds, overnight funds, and ultra short
term funds to build an emergency fund.
Better
than conventional schemes
Conventional
schemes like bank fixed deposits have witnessed a slump in interest rates in
the past few years. Plus, these schemes come with a predetermined lock-in
period which locks an investor’s money for a fixed duration. This is not the
case with debt funds as they do not have any lock in period. Also, debt funds
try to generate better returns than conventional schemes and have succeeded at
it on several occasions.
Low
holding cost
Debt
funds have a low expense ratio than equity funds and hence, low transactional
costs. They do not attract TDS either unlike some conventional schemes like
FDs. A low expense ratio might allow the investor to earn better capital gains
than schemes with a high expense ratio.
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