5 Reasons You Should Also Invest in Debt Mutual Funds

New Delhi (India), August 8: Investing is about managing risk and return to achieve your financial goals. Most investors pay attention to fair investments to get high returns and regularly ignore debt mutual funds. However, various debt prices can stabilise your investment portfolio and help mitigate risk. Read on to learn five compelling reasons to allocate some of your investments to debt-mutual funds.

What are Debt Mutual Funds?

Debt mutual funds are those mutual funds that primarily investing in fixed-income securities like government securities, treasury bills, bonds, certificates of deposit, commercial paper, and money market instruments. The underlying instruments offer fixed returns over specific durations, providing predictable income streams for investors. Debt funds allocate the pooled capital of retail investors across diversified portfolios of such debt instruments. 

Fund houses employ experienced fund managers to evaluate credit risk, gauge interest rate cycles, and assemble optimal debt security baskets matching the fund’s objectives. Key merits of debt mutual funds encompass low volatility compared to equities, regular payouts through interest income, high liquidity allowing redemption flexibility, and reasonable returns. 

They suit investors prioritizing capital preservation and income over chasing market-linked growth. Debt funds promote portfolio stability and diversity for balanced investing aligned with an investor’s risk appetite and needs. They carry moderately lower risk, catering to conservative and equity investors seeking risk-mitigating investments.

Reasons to Invest in Debt Mutual Funds 

The following are some compelling reasons to invest in debt mutual funds: 

1. Provide Stability Against Volatility

Equity markets tend to be highly volatile, with stock values fluctuating daily. In contrast, debt funds in India invest predominantly in fixed-income instruments like bonds, government securities, treasury bills, certificates of deposit, and commercial paper. These instruments’ predictable interest payments and maturity value act as a stabilising force in your investment portfolio. 

While equity delivers higher returns over longer durations, it also carries higher risk. Combining equity and debt provides a balanced portfolio aligned with your risk appetite. Debt funds reassure you that a portion of your capital faces fewer risks. This stability is valuable when equity markets crash, helping you ride out the storm without panic selling.

2. Generate Regular Income

Unlike equity funds, which focus heavily on capital appreciation, debt funds aim to provide consistent income. This characteristic makes them ideal for investors seeking regular earnings. 

You can earn monthly, quarterly or annual payouts depending on the type of debt fund you choose. The payouts primarily comprise interest income earned from the underlying fixed-income instruments. Depending on your need for liquidity, you can opt to receive payouts at regular intervals.

Retirees find this steady income stream from debt mutual funds valuable to supplement their overall income.

3. Act as a Liquidity Buffer  

Debt funds score higher on liquidity than fixed-income instruments, such as bank FDs, NCDs, bonds, etc. Open-ended debt funds allow you to redeem your investment instantly without waiting for maturity.

This flexibility helps debt funds act as a liquidity buffer in emergencies. Equity funds often require you to stay invested for longer to minimise losses. In contrast, instant redemption from debt funds provides ready access to your capital whenever you need it urgently.  

4. Provide Low-Risk Avenue for Parking Short-Term Funds

Short-term funds parked in savings accounts generate negligible returns. Debt funds provide a low-risk avenue for deploying surplus funds for shorter tenures while earning superior returns.  

Fund categories like liquid, ultra-short-term, money market, and overnight funds match suitable debt instruments to even very short investment horizons. Recommended especially for temporal surpluses, they provide relatively safe means to gain incremental returns without locking away your money.

5. Help New Investors Get Started

For new investors just starting their investment journey, directly selecting the right equity stocks or funds can be challenging. Debt funds offer a more accessible entry point with a more straightforward evaluation of risks and returns.  

With lower volatility and risks compared to equities, short-term debt funds offer new investors a smooth transition towards long-term investing. Besides providing stability and steady returns from the start, they allow new investors to gradually build the knowledge for making future equity investments.

Debt funds offer stability, liquidity, and income, making them versatile investments. Include them in your portfolio for a healthy risk mitigation and returns balance. Evaluate your investment horizon, liquidity needs, and risk tolerance to decide which debt funds match your financial plan.

Conclusion

Debt funds are stable, low-risk mutual fund investments for Indian investors, prioritizing capital protection and income. With diverse debt fund categories now available in India, when structuring a balanced mutual fund portfolio, explore options that match your investment objectives and risk appetite. Evaluate offerings from leading financial service companies like ABSL Mutual Fund to identify debt funds that suit your needs.

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