When it comes to mutual funds, you may have equity mutual funds in your portfolio and know why those investments are beneficial. But what about debt mutual funds? Are those beneficial and should you consider investing in them? Yes, there are several reasons to invest in debt funds. Here are six of the most important ones.
1. Lower risk
Debt mutual funds carry lower risk compared to equity-focused instruments such as equity mutual funds. That’s because debt funds invest in fixed-income securities such as bonds that are not impacted by stock market volatility. Investing in debt funds helps ensure capital preservation as the risk of capital losses is a lot lower than equity investments.
2. Regular income
Since debt funds invest in securities like bonds and certificates of deposit that carry a coupon or interest rate, investing in debt funds is great for investors looking for a regular stream of income. You can either opt for receiving these interest payments of the underlying securities of the debt fund or choose to reinvest it for the benefit of compounding.
3. Parking of funds
Debt mutual funds are of various types depending on the average tenure of their portfolio and the credit quality of their holdings. And a lot of debt funds such as short-duration funds and money market funds tend to be great when you want to park your money for a short period before utilising it for a specific goal or purpose. Debt funds, unlike bank fixed deposits, allow you to earn a good rate of return while keeping a chunk of your money highly liquid.
4. High liquidity
Liquidity, when it comes to investments, is the ease of access to your money. Liquidity is important because you never know when you need funds and debt mutual fund investments are highly liquid. There is no lock-in period or penalty for redeeming your units. You can redeem your debt mutual fund investments at any time and your money will be credited to your bank account within two to three working days.
5. Hedging equity investments
Any classic portfolio will have asset allocation across both equity and debt. That is because each asset class has different risk-return profiles, and the inherent volatility of the stock market can be hedged by making debt investments. Hence, when you invest in debt mutual funds, you are lowering the risk of your overall investment portfolio.
6. Professional management
When you invest in a debt mutual fund, there is a fund manager who makes all the important investment decisions – what to buy, when to buy, when to sell, etc. These decisions are made in a way that the returns of the debt fund are maximised. Hence, even if you do not have a lot of knowledge of how debt instruments work, you can still benefit from them by investing in debt mutual funds.
Based on your financial goals, risk tolerance, and investment horizon, you can select one of the many types of mutual funds out there. They make for a stable, low-risk investment that is highly liquid and helps hedge against stock market volatility.