5 Reasons to Invest in Debt Funds

Mutual funds are primarily categorized based on their unique attributes and features like fund size, allocation of assets, investment objective, etc. Investors with high risk tolerance invest in equity mutual funds which invest predominantly in equity and equity related instruments. These investors do not want to settle with low returns and hence take the extra risk with the hope of earning high rewards. But equity markets are volatile in nature, and if you invest beyond your limits, you might end up losing your initial amount.

Debt mutual funds are those mutual funds that are known for their consistent returns. While equity funds invest predominantly in equity and equity related instruments, debt mutual fund investments in fixed-income market securities like treasury bills, call money, corporate bonds, etc. These securities come with a short term maturity of up to 91 days. Hence, a lot of investors invest in debt mutual funds to meet short term goals, and you, too, depending on your financial goal, should decide on which instrument you should invest your hard earned money.

Here are five good reasons to invest in debt funds

1. Debt funds have short maturity: Although most investments are made keeping a long term perspective in mind, there are times when you due to some emergency, you are in need of cash. In such vulnerable moments, debt funds can easily be liquefied as these come with a short maturity period. So if you want to give your investment portfolio some liquidity, you can consider investing in debt funds. Also, most of these debt funds do not have an exit load; hence you are not penalized for immediate withdrawals.
2. Debt funds are ideal for achieving short term financial goals: Debt funds can 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.
3. Debt mutual funds have low risk ratio: Since these funds invest in fixed income securities, investing in debt mutual funds is considered to be far less risky. So risk averse investors seeking capital gains can consider investing in debt funds. Your investments will continue to grow at low but consistent rates, and hence, these funds can be idle for lumpsum investments as well.
4. Debt mutual funds offer great flexibility: You can invest in debt funds via 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 his or her bank, and every month a predetermined amount is debited from their account and transferred to your debt fund. Depending on your flow of income, you can even modify your monthly SIPs. This way, debt fund investments do not just offer you with flexible payments via SIP; it also plays an essential role in allowing investors to give their investments a systematic approach.
5. Debt funds give you two payout options: You can invest in debt funds either through growth or IDCW option. Investors have these two payout options, and depending on their investment objective, they can choose from either of these. In growth options, the returns garnered by the fund are reinvested in the fund. Growth option is ideal for investors who wish to remain invested for the long run. The growth option also tends to increase the fund’s net asset value or NAV in the long run. But if you are investing in debt funds with the hope of seeking returns at regular intervals, you may opt for IDCW option. Here, the returns aren’t reinvested in the fund and instead are offered to investors in the form of IDCW / bonuses.

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 keep 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 holds the potential to help you meet your investment objective.

Mutual fund investments are subject to market risk, and although debt funds carry low risk, they aren’t entirely risk free investments. So if you are new to mutual funds, it is advisable that you consult a mutual fund expert to guide you through your investment strategy. Remember that it is your hard earned money that you are entrusting in a fund. Make sure that you only invest in funds owned by reputable companies to lower your risk further. You can also track the performance of the fund along with other criteria like the fund’s size, the fund manager handling the fund, the investment objective of the fund, the risk profile it carries, its past performance, etc.

Investing is a long journey, and the key to success is consistent and disciplinary investing.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.