Debt funds, types of mutual funds are under the spotlight for the past few years. These mutual funds are relatively safer and low-risk investment options that provide various options to investors depending on their needs, risk profile and horizon. If you are wondering what a mutual fund is, a mutual fund is simply a financial vehicle made by pooling the money of various investors. This pooled money is further invested into a variety of securities such as equities, debt, money market instruments, etc. depending on the investment portfolio. You must be aware of the benefits of mutual funds, let’s understand the advantages of including debt investments in your financial portfolio:
- It has low transaction cost as compared to other mutual fund investments
- They are the best option for an investor with a low-risk appetite
- They are highly liquid which can easily be converted into cash
- Provides better returns on investment in contrast to bank FDs
- There is no deduction of tax on the earrings of debt funds.
If you’re a risk-averse investor, you can opt for debt mutual funds. But before you invest in these mutual funds follow these essential tips:
- Know the risk–Unlike equity funds, a debt mutual fund allows you to alleviate risk when the market is unstable. You receive diverse benefits from debt mutual funds since it is invested in a range of fixed income instruments all of which mature at different times.
- Pick the right funds–Under debt funds, one can choose between liquid funds, money market funds, dynamic bond funds, and corporate bond funds etc. based on your preference. In addition to earning a decent post-tax return choosing the right type of debt mutual fund allows you to save money. A low-risk investor can choose a debt investment without any worry because they variegate across multiple fixed-income securities and so you receive near-stable returns.
You can also invest in debt mutual funds if you belong to the following category:
- Short-term investors – investing in debt mutual funds is an excellent option if you aim to fulfil your short-term goals within 3-12 months. As a short-term investor make sure to look for liquid funds that offer returns between 7%-9%.
- Medium-term investors – it is advisable for a medium-term investor with moderate risk tolerance, to choose a dynamic bond fund with a tenure of 3 to 5 years. This is because these funds invests in debt instruments that have different maturity periods depending on their interest rates, which eventually will work in favour of a medium-term investor.
All in all, debt mutual funds still hold a place in an investor’s profile given the low-risk factor they carry. Whether you decide to move forward with debt funds or not, entirely depends on your risk apettite, investment horizon, and financial goals. You can also avail the services of an expert who can help you manage your portfolio and invest in mutual funds online. Happy investing!