Do debt funds still have a place in an investor’s portfolio?
In the aftermath of the COVID-19 pandemic, some disarray has been witnessed in the debt funds market. However, despite all the uproar, investing in debt funds is still helpful for investors. Less risky than equity funds, debt fund investments safeguard your capital from market risks.
Before you invest in debt funds, let’s understand them in detail:
What are debt funds?
Popularly known as fixed-income funds or bond funds, debt funds are relatively safer, low-risk investment options. When you invest in debt mutual funds, your money is directed towards fixed-income instruments such as corporate and government bonds, money market instruments, corporate debt securities, etc. These instruments have a maturity date, until which you receive fixed interest on the investment while the principal amount is returned upon maturity.
There are multiple benefits of debt mutual funds such as stable returns, low-cost structure, etc.; so if you’re looking for a low-risk avenue to park your money, you can opt for a debt mutual fund investment.
Follow these essential tips before you invest in debt mutual funds:
- Know the risk
A debt mutual fund investment allows you to mitigate risk during market volatility. Since it is invested in an array of fixed-income instruments, each of them matures at a different time. Hence, you receive diversification benefits from debt mutual funds. While the fund’s price depends on the risk, the interest rate risk and default risk are unchanged.
- Pick the right funds
The right type of debt mutual fund allows you to preserve your money as well as earn decent, post-tax returns. Under debt funds, you can choose between liquid funds, money market funds, dynamic bond funds, and corporate bond funds, etc., based on your preference.
Debt funds diversify across multiple fixed-income securities; hence, you tend to receive near-stable returns. Thus, low-risk investors can choose a debt mutual fund investment without any worry. Besides, you can invest in debt mutual funds if you belong to the following category:
- Short-term investors
A debt fund is an excellent option for investors who aim to fulfil their short-term goals within 3-12 months. As a short-term investor, look for liquid funds that offer returns between 7%-9%.
- Medium-term investors
As a medium-term investor with moderate risk tolerance, you can select a dynamic bond fund with a tenure of 3-5 years. A dynamic bond fund invests in debt instruments that have different maturity period based on their interest rates, which will work in favour of a medium-term investor.
In a nutshell, debt funds still hold a place in investor portfolios because of the low-risk they carry. Look for debt funds that offer sector profiling and liquidity profiling in addition to diversification. Spot the warning signals and act promptly before making the investment.