Most retail investors are more concerned about earning capital appreciation through equity. And they are right to some extent. Equity mutual funds are known to offer capital appreciation over the long term. They have outperformed every other conventional scheme in the past and can even help investors achieve long term financial goals like building a retirement corpus or securing the financial future of someone’s children. However, some people ignore the fact that equity funds are highly volatile in nature and can even generate negative returns in the short run. This is exactly why investors who only invest in equity mutual funds must consider diversifying their investment portfolio with debt mutual funds.
Today we are going to focus on the top five reasons to invest in debt funds. But first, let us understand what debt funds are.
What is a debt mutual fund?
A debt fund is an open ended mutual fund scheme that aims at generating stable returns by building a portfolio consisting of various debt fixed income securities and debt related instruments like government and corporate bonds, treasury bills, debentures, CBLO, reverse repo, etc.
Here are the top 5 reasons to consider debt mutual funds –
The portfolio doesn’t get affected by market fluctuations
The underlying securities of a debt mutual fund’s portfolio majorly comprise debt related instruments. Hence, they do not get affected by any fluctuations in the equity markets. Even if volatility hits equity markets and they begin to underperform, debt mutual funds are less likely to get affected by them. However, your investments in equity mutual funds are bound to get affected if the underlying securities in which they invest underperform in volatile markets.
Ideal for short term investing
Although it is always recommended to remain invested in mutual funds for as long as possible to make the most out of your investments, not everyone has the time horizon to remain invested for five years or more. Such investors usually opt for equity funds as they are known to offer 12% to 15% returns in the long run. However, debt funds are best suited for investors with an investment horizon of up to 12 months. Most debt schemes like liquid funds and overnight funds invest in debt securities that mature in a short period and hence are best suited for anyone who wishes to park their money for a very short term.
Ideal for investors with low risk tolerance
Equity funds may be help investors in long term wealth creation, but they are highly volatile and hence only investors with a very high risk appetite consider these market linked schemes. However, that’s not the case with debt funds, and investors with moderate to low risk appetite can consider investing in even. They are also best suited for those moving away from conventional schemes due to a drastic slump in interest rates.
Debt funds may not be the best investment option when it comes to high returns earning mutual fund schemes as their main investment objective is to generate optimal returns whilst providing capital protection to investors. These funds invest in instruments like government bonds that are less likely to repay the borrowed loans and hence investors can earn moderate returns while keeping their invested sum safe.
Diversify your investment portfolio
If you reach out to any mutual fund expert, he/she will always advise you to have a diversified portfolio. Investors must diversify their investment across various assets so that they do not have to rely on anyone market for generating returns. If you have an equity-heavy portfolio, you can give it some liquidity and diversification by adding an element of debt to it.