Although debt funds have their own advantages, they are largely ignored by ordinary investors. Debt funds have a unique place in your portfolio. Here are five simple situations, in which debt funds can be used by prudent investors. Investment funds are classified primarily based on their unique attributes and characteristics, such as fund size, asset allocation, investment objective, etc. Investors with high risk tolerance invest in investment funds that invest primarily in equity and equity-related instruments. These investors do not want to settle for low returns and therefore take on additional risk in the hope of great rewards. But the stock markets are volatile by nature, and if you invest beyond your limits, you could end up losing your starting amount.
Debt mutual funds are those mutual funds that are known for their consistent returns. While equity funds invest primarily in equity and equity related instruments, mutual fund debt investments in fixed income market securities such as Treasury bills, call calls, corporate bonds, etc. These securities have a short-term maturity of up to 91 days. Therefore, many investors invest in debt mutual funds to meet short-term goals, and you too, depending on your financial goal, must decide which instrument to invest your hard-earned money into.
Here are five good reasons to invest in debt funds
Debt funds have a short maturity
Although most investments are made with a long-term perspective in mind, there are times when you need cash due to an emergency. At those vulnerable times, debt funds can easily liquefy as they come with a short maturity period. So if you want to give liquidity to your investment portfolio, you can consider investing in debt funds. Furthermore, most of these debt funds do not have an exit charge; therefore, you are not penalized for immediate withdrawals.
Debt funds are ideal for achieving short-term financial goals
Debt funds may be suitable for meeting short-term goals. So if you have an investment horizon of 10 to 12 months or a maximum of 1 to 2 years, you can opt for debt mutual funds.
Debt mutual funds have a low risk ratio
Since these funds invest in fixed income securities, investing in debt mutual funds is considered much less risky. Therefore, risk-averse investors seeking capital gains may consider investing in debt funds. Your investments will continue to grow at low but consistent rates, and therefore these funds may also be dormant for global investments.
Debt mutual funds offer great flexibility
You can invest in debt funds through SIP. This is an easy and simple electronic process of transferring money from your bank account to your debt fund. All an investor has to do is inform their bank, and a predetermined amount is debited from their account each month and transferred to their debt fund. Depending on your income stream, you can even modify your monthly SIPs. In this way, investments in debt funds not only offer you flexible payments through SIP; It also plays an essential role in allowing investors to give their investments a systematic approach.
Debt funds provide you with two payment options
You can invest in debt funds using the growth or dividend option. Investors have these two payment options and, depending on their investment objective, they can choose either of these. In growth options, the returns obtained by the fund are reinvested in the fund. The growth option is ideal for investors who want to remain invested for the long term. The growth option also tends to increase the net asset value of the asset or NAV in the long term. But if you are investing in debt funds in hopes of earning returns at regular intervals, you can go for the dividend option. Here, the returns are not reinvested in the fund, but are offered to investors in the form of dividends / bonds.
Debt mutual funds are ideal for risk-averse investors seeking capital gains to meet short-term goals. However, it is advisable that investors do not store all their eggs in one basket and diversify their mutual fund portfolio with other funds as well. No matter where you invest, always keep your ultimate financial goal in mind. Invest only if the scheme has the potential to help you achieve your investment objective.