Indians generally associate a mutual fund investment with terms like stocks, equity markets, and high risk. People do so because they think a mutual fund is a way to participate in the stock market. However, some funds invest in a wide range of non-stock instruments. These mutual funds can generate returns at a much lower risk. They are debt mutual funds.
What are debt mutual funds?
Whenever financial experts introduce the option of a debt mutual fund to prospective investors, firstly, they ask, “What are debt funds?” Debt fundsallocate funds to fixed-income instruments.Things such as treasury bills, government securities, and corporate bonds are examples of fixed-income instruments. Bonds are known for offering returns in the form of interest. Businesses borrow money by issuing bonds with a fixed maturity. The interest rate paid to you is clearly defined, and you will be compensated the interest amount till maturity. The principal amount is paid only on maturity. Debt funds have a reputation for being a safer investment option which is the opposite of equity funds.
What are the benefits of accumulating debt funds?
Here are some of the numerous advantages linked with debt mutual funds:
- They involve lower risks:
Debt funds are among the top mutual funds because they are less risky than equity funds. They are ideal for investors who want a steady income. These funds direct investments to government securities. Government securities generally carry little risk, and debt funds invest only in corporate papers with a high credit rating.
- These funds offer liquidity:
Debt funds are much more liquid in comparison to other fixed-income instruments. These instruments don’t have a long lock-in period, unlike corporate bonds or FDs. Your debt mutual fund can be redeemed within a few days. For liquid funds, the redemption period could even be quicker.
- Portfolio diversification is easy:
Diversifying your investment portfolio can reduce risks. You need a high-risk appetite to invest in equity funds and enjoy high returns. Add some debt instruments to your portfolio for balancing the risk if you don’t have a high-risk appetite.
- There are tax benefits:
Apart from ELSS, even debt funds offer some tax benefits to their investors. For instance, interest earned through an FD is added to your taxable income. Therefore, you will be taxed annually. On the other hand, in debt mutual funds, you will be taxed only on their redemption.
- Helpful in reaching financial goals:
Investing in debt funds is a sure-fire way to meet your investment goals. To build a retirement corpus, you must invest in debt funds. Equity markets are unpredictable. Therefore, you must stay invested for a long time to enjoy returns from the equity market. Conversely, debt funds are not that volatile. You should invest at least 60% in debt funds for your retirement corpus.
Debt funds are a great way to start your investment journey without involving the risks associated with equities. But it is important to note that they are not just for low-risk investors. Equity investors should reduce portfolio risks by adding debt instruments. Doing so will give their investments a cushion.