Benefits of investing in debt mutual fund

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.