An investment in debt asset class is considered to be safer when compared to other asset classes especially when put side-by side of equities.
To a large extent, this is true, as returns in equities are more volatile than debt assets. This lower volatility brings in a perception of safety to debt assets such as debt mutual funds. However, this may not always hold water and one need to be aware of the risks involved in investing in debt funds.
Before we read further, let us be clear that even though the returns in debt funds may be impacted in short-term, the returns over a medium to long term may still be adequate to beat bank fixed deposit returns especially after taxation and indexation.
Where do debt funds invest
In debt funds, your investments are not affected by equity market volatility. Debt Mutual Funds invest in a range of interest bearing instruments such as Treasury Bills, Government Securities, Corporate Bonds, Money Market Instruments and other debt securities. Generally, debt securities have a fixed maturity date & pay a fixed rate of interest.
Advantages
Any investment in debt funds adds stability to your investment portfolio. As debt mutual funds mainly invest in debt securities, they are relatively more stable than equity investments. They can also lend stability to your equity portfolio by reducing the risk associated with your complete investment portfolio. All open ended mutual funds give you the freedom to withdraw your money as and when required, although your investments may be subject to an exit load. This lends liquidity to your investments. Compared to bank fixed deposits, one can expect better post tax returns.
Parameters to consider before investing
It is important for you is sometimes overlooked by investors, who remain invested for long periods without considering the market factors. The specific investment horizon should be looked at to aim for optimum risk adjusted returns in the Debt Funds.
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