Top 7 reasons why you should invest in Debt Funds

Debt funds are a subgroup of mutual funds that invest a significant portion of their assets in securitised debt securities and capital-appreciating money market securities. Since they do not invest a sizable amount of their assets in equities, which makes them more volatile, debt funds are less hazardous than equity funds. They offer returns that are nearly fixed and expand within the projected range. Risk-averse investors who can balance the risks in their portfolios by balancing debt investments with equity investments are suitable for it.

According to their unique priorities, goals, and risk tolerance, investors should make a combination of investments in shares, debt, gold, and other assets. The investment portfolio becomes more broad and balanced by including debt funds with other types. Here are some benefits of debt funds that make it compelling for investors to do so:

Stable Returns

Due to their lower reliance on market emotion, debt funds are renowned for providing consistent returns. Debt funds allocate 65% of their corpus to less volatile debt securities than stocks, such as certificates of deposits, debentures, bond papers, etc. They may not produce as large returns as equities funds, but they also do not fall as quickly because they are less subject to market fluctuations.

Low-risk

Debt funds are appropriate for cautious investors who want to maximise capital gains with the least amount of risk. They are somewhat more resistant to market volatility when investing in fixed-income securities with set maturity dates and interest rates. Therefore, combining these funds with some equity funds in the portfolio balances the risk-return profile. When equity funds are not doing well, they serve as a hedge against market volatility.

Liquidity

Debt funds are simple to liquidate because you may rapidly cash them out and redeem them at any moment. It is simpler than other fixed-income investment options, such as money market accounts (FDs), which may have lock-in periods and penalties for early withdrawals. Debt funds offer high liquidity because they don’t have this kind of lock-in.

Regular Income

An advantage of regular income debt funds is that investors can withdraw their regular income. You can receive your dividend income and use SWPs (Systematic Withdrawal Plans) to sell your fund units and withdraw money as needed.

Tax Efficiency

Debt funds definitely give more tax benefits than bank deposits, even though equity funds might be more tax-efficient than debt funds. In addition to receiving reduced interest on your money when you deposit it in a fixed deposit, you also have to pay taxes on it annually. On the other hand, debt funds offer larger returns and are only taxed when the units are redeemed.

Good for Emergency Funds & Short-Term Goals

Debt funds are a good option for investing extra cash so you may earn interest. Debt funds can be very helpful in achieving short-term objectives because they often offer higher interest rates than bank savings. Additionally, you can retain a cache of money in loan funds to build an emergency fund to handle sporadic monetary emergencies.

Flexibility

You have the choice to make a lump sum investment in debt funds if you have extra cash. Alternatively, you can make modest investments through SIPs (Systematic Investment Plans) or move units across funds using STPs (Systematic Transfer Plans).

Conclusion

Your portfolio can be diversified and stabilised by using debt funds, which produce consistent returns from fixed-income assets. Both novice investors and those with modest risk appetites can use them because they balance out market volatility. Additionally, because they are so simple to redeem, you may use them to both create an emergency reserve fund and spend them when you need urgent liquidity.

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