Many newbies make a common error of investing all their available funds in just one kind of investment. The success story of every successful investor will always scream the importance of diversification. Moreover, you should be exposed to multiple varieties of asset classes rather than investing in just one asset class that you’re comfortable with. One such asset class that you shouldn’t avoid investing in is debt. A debt market is a place where you have to place your funds to multiply your wealth. For the ones who are just starting their investment journey, debt funds in India are a major and crucial segment in anyone’s portfolio.
If you are not aware of the term debt funds, how to invest in them and their benefits then click on the link below to know everything about debt funds in India:
What are debt funds?
Debt funds are the type of mutual funds that invest the money of investors in securities that generate fixed interest. This includes corporate and government bonds, money market instruments, and debentures. Additionally, debt funds in India are safer instruments than volatile equity securities. There is low risk involved which also implies low return as risk and return are directly proportional. They are available in different maturity periods and can help you generate income periodically or at maturity. Every debt security has a system of credit rating that allows the investors to understand priorly about the possibility of default by any debt issuer.
Debt funds in India are considered to be the best investment alternative at such a low risk as they aren’t very volatile. However, investors or newbies often find themselves in a confusing state when they are choosing debt funds that suit their requirements, goals, and profile.
Benefits of investing in debt funds in India
There are many benefits of investing in debt funds. Here we will share some important benefits that might change your investment decision. Benefits are:
- Hedge against Volatility: Debt funds in India offer a good hedge against the volatile equity market. The percentage of debt that your portfolio consists of will directly depend on your financial plans and the timelines for investment. It also depends on your willingness to take risks and your capability to take risks. Such a type of diversification will help you stabilize your investment returns.
- Lower Fees: Debt funds in India have a low fee as compared to equity or any other mutual funds. You will have to pay less and they offer better returns than FDs or savings accounts.
- High Liquidity: There is high liquidity as they can be easily sold and you can cash out your investment smoothly. In other investment instruments, once you invest, your money gets stuck due to low liquidity since no one is willing to buy and it takes forever for you to exit any position. But in debt funds, you can get your funds back quickly. If we talk about FDs, mostly they have a lock-in period and penalty for premature withdrawal. Suppose once you invest your money, and there’s a certain emergency that arrives, you should invest in such a manner that you can take out your money any time, which is possible in debt funds.
- Stable returns: Stable return is a key benefit of debt funds in India. The returns that are received from investing in debt funds are not dependent on any market sentiments. They are safer options and with low risk involved.
Things to consider before investing
- Debt funds in India are the least risky type of mutual funds but you should also keep in mind that it’s a market-linked product. There are certainly no guaranteed returns, and the best-performing ones are also exposed to risks like credit or interest rate risk. Interest rate risk generally depends on the market interest, on which fund managers have limited control. So you should not invest in them thinking there is no risk at all. A certain amount of low risk is there and it should be considered before investing in them.
- Credit risk most likely arises due to an upcoming possibility of default on principal payments or interest by the bonds that are held by debt funds. The credit rating of such funds is downgraded which makes them riskier and also has more potential to earn higher returns. Moreover, investors can minimize the risk by assessing the parameters of the fund carefully and choosing the best suitable one with a proven track record. Make sure the risk-return expectations are always aligned with the investment objective of debt funds.
Debt funds are considered to be the best investment alternative at such a low risk as they aren’t very volatile. However, investors or newbies often find themselves in a confusing state when they are choosing debt funds that suit their requirements, goals, and profile. Hence after reading this article we hope you are more clear about the debt funds.