This Is Why You Should Consider Including Debt Funds In Your Portfolio

08 September 2022
5 min read

One golden rule of investing is that your portfolio must always include fixed-income products, no matter what your age is or how interest rates are moving. But, unfortunately, we often ignore debt funds only because they give lesser returns than equities. 

However, debt funds are an essential investment instrument, and as an investor, one should figure out the factors that make these funds relevant to investment. Debt mutual funds are debt funds that invest predominantly in fixed-income instruments.

Debt mutual funds are a popular form of investment in India. Debt mutual funds have proven to be a good investment option for many people looking to invest their money.

Debt mutual funds have proven to be a good investment option for many people looking to invest their money. They are usually recommended by financial advisors or planners, who often use them as an alternative to other investments like equity mutual funds or equity-based ETFs.

Debt mutual funds invest primarily in debt instruments, like corporate bonds, government bonds, bonds issued by banks, etc. These mutual funds are best for investors who are risk averse.

Why Should You Invest In Debt Funds?

Debt mutual funds are a good addition to your portfolio in India. Here are some of the advantages you can expect from having them-

1) More Liquidity

Debt mutual funds offer more liquidity because they invest in debt instruments that are typically highly liquid (they can be converted into cash quickly). This means you can use these funds as short-term investments or as part of a bond ladder.

2) Reduce Risk in Your Portfolio

A debt mutual fund reduces the risk in your portfolio because it is less volatile than equity funds. For example, if you have an equity fund that has suffered losses over time, you might want to switch to a debt fund with less risk of losing money over time.

3) Tax Benefits

Income from debt mutual funds is not taxable as long as you have held them for at least one year. The Debt Mutual Funds in India offer tax benefits and a lower funding cost than other types of investment vehicles such as equities or fixed income securities such as bonds or debentures etc.

This is because they do not require any upfront capital investments, unlike equity shares, where investors need money upfront before they can start investing every month or quarterly, depending on how frequently they want to withdraw their profits from the fund portfolio.

4) Flexibility 

Debt Mutual Funds in India offer flexibility. The funds will be able to accommodate your financial needs and help you achieve your goals. Moreover, you can invest in debt mutual funds without worrying about limited liquidity or redemption options. These are some of the reasons why people prefer investing in debt mutual funds rather than stocks.

5) Stability 

The Debt Mutual Funds in India provide stability and regular income. These funds have a long time horizon so that they can offer stable earnings to investors. They also have a low-risk profile, which helps them maintain a good level of returns over time even during challenging market conditions like the 2008 crisis when most other fund managers suffered losses due to poor performance by their stocks or bonds holdings.

Why Do Debt Funds Remain Stable During Market Lows?

Debt funds, which invest in various debt and fixed-income securities of different maturities and credit quality, protect you from equity market volatility and offer decent returns. Unfortunately, the domestic market fell big time in the last month. Still, the returns from debt mutual funds are stable.

The reason is that yields on bonds, both government and corporate, are high, thanks to the Reserve Bank of India’s (RBI’s) 13 consecutive rate increases since March 2010. The yield on 10-year government bonds maturing in 2021 with a 7.8% coupon rate, or interest rate, is close to 8.9%, while the yield on three-month treasury bills (T-bills) is 8.7%.

A one-year certificate of deposit (CDs) issued by commercial banks gives 9.5-9.7%. But the IL&FS episode has essential lessons for debt investors. First, if you are keen on a higher return from your debt funds, keep in mind that it will come with a certain degree of risk.

Instead of aiming at high returns, investors should look at getting optimal post-tax returns in debt and treat debt not as a wealth creator but as a stable source of income.

Benefits Of Having A Debt Mutual Fund In Your Portfolio

Here are a few critical reasons for you to invest in debt funds-

  1. Debt funds are the best option for an investor with a low-risk appetite.
  2. It helps fund houses to bring stability to a portfolio for diversification of mutual funds.
  3. Debt funds are highly liquid and can be easily converted into cash, that too, within a day time.
  4. There is no deduction of tax or TDS on the earnings from debt funds. Taxes are to be paid only when an investor sells or withdraws fund units and depending on the investment period.
  5. Provides better investment returns than bank FDs and parks surplus money in savings accounts.
  6. A debt fund has low transaction costs as compared to other mutual funds.

Conclusion

Debt funds are low-risk mutual funds that invest most of their money into fixed income instruments like corporate bonds, government bonds (both state and central), bonds issued by banks, certificates of deposit, treasury bills, etc.

Debt funds are preferred by individuals who are not willing to invest in the highly volatile equity markets. But please remember, don’t invest in debt funds without doing your homework. Performance, track record, scheme-specific attributes, portfolio credit quality, fund manager track record, and expense ratio matter when investing in debt mutual funds.

Happy Investing!

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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