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Know if you need a debt fund in your portfolio

People want to build a big corpus but aren’t willing to give their investments enough time to grow. Becoming wealthy overnight is almost impossible and hence investors must learn to be patient with their investments. Impulsive behavior leads to risky investment decisions and one is often seen facing losses because he/she did not invest in a scheme that aligned with their risk appetite. If you consult a financial advisor, they will always ask you to not depend on a single investment scheme for generating returns. Investors must always diversify their portfolios across various assets so that they can allow their portfolios to seek exposure to different investment opportunities.


Young investors tend to have a 100 percent equity-oriented portfolio because they know that investments in equity mutual funds will help them build a long-term corpus. However, not all asset classes perform in tandem, and in most scenarios, when equity markets are underperforming debt mutual funds seem to generate stable returns. Equity and debt are known to have an inverse relationship and hence it is better to invest in the right mix of both these assets to allow one’s portfolio to have the right amount of balance.


If you are wondering whether you should invest in a debt mutual fund, here are a few reasons why you should:


Avoid concentration risk

Suppose you invest all your investible corpus in gold. If the domestic prices of gold go down, your entire investment portfolio will underperform. An investor will not be able to withdraw their investments till gold as an asset class witnesses correction. The point here is that all asset classes cannot perform in tandem. If the equity markets are performing today, they may underperform tomorrow. And during that time, your investments in debt funds will act as a cushion to your entire investment portfolio. Also, investing all your money in a single asset class will lead to concentration risk. Hence, investors who have allocated all their finances to one asset class should consider debt funds to avoid concentration risk.


Debt funds offer high liquidity

Another major reason one should consider debt funds is because they do not have a lock-in period, thus offering immense liquidity to an investor’s portfolio. For example, if you have invested in a tax saving scheme like Equity Linked Savings Scheme (ELSS), your money is locked in for a minimum period of three years. Now, during this period if you face a financial emergency you won’t be able to liquidate your ELSS investments. During such vulnerable moments, investments in debt funds like liquid funds can come in handy. Liquid funds have an instant redemption option and do not have any exit load. Thus, debt funds like overnight funds, ultra short-term funds, and liquid funds give an investor’s portfolio the liquidity that it deserves.


Better returns than FDs

The main investment objective of debt funds is to offer better returns than conventional schemes like fixed deposits whilst protecting an investor’s capital. Also, who you invest in FDs, your money is locked in till the age of maturity. Debt funds try to generate returns better than FDs while providing immense liquidity to investors. This way, investors can give themselves an opportunity to generate stable returns while maintaining a highly liquid portfolio.

If you are investing in debt funds like gilt funds and long duration funds that have a longer portfolio maturity, you can consider starting a SIP. Investors can also use online SIP calculator to determine the future returns that they might earn through systematic and regular SIP investments. 

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