Who should invest in debt fund?

If you are wondering whether debt mutual funds are the right choice for you, then let us start by saying, yes! Debt mutual funds have something for every kind of investor. The more relevant questions here will be - whether it is the right time to invest in debt funds for you? Or what kind of debt funds to invest in? Or are the debt funds you are choosing, in alignment with your financial goals?

Here are various investor segments and how investing in debt funds can help them

If you have never invested in mutual funds before, investing in debt funds can be a good entry point as the risks associated are lower, and the stability of investment offered is relatively higher than equity mutual funds. For someone who is migrating from traditional investment instruments to mutual funds, debt funds offer a good middle ground to get used to the way mutual funds work while attempting to generate better returns than the traditional vehicles.

Investors incline towards equity investing, are often long-term investors. If you are one of them, it does not imply that your portfolio be devoid of debt funds. Debt mutual funds can help you in the short-term parking of your funds, when perhaps the market is not favourable for an investment immediately. Even for short-term goals, debt funds can be beneficial while providing you a suitable diversification in your portfolio.

At a later stage in life, when your goals are chalked out, and you have invested for a while, you may need debt funds in your portfolio to balance the risks associated with equity or other asset categories like gold, real estate, etc. At this stage, debt funds can get you portfolio stability, as compared to equity portfolio; it can also help you to put your lump sum money in reserve before you start a systematic transfer plan to your equity funds.

Safe investors are those who are not willing to take any major risks with their money & may look at debt funds as suitable options to achieve their financial goals. They might aim to achieve their short term & long term goals like retirement, buying a car, and education through debt mutual funds or other relatively safer options of investment. Even young investors who are risk-averse might prefer debt mutual funds.

Retirement is a major goal that most investors invest for. Having reached that stage, you need stable returns to sustain your daily expenses. There can also be other responsibilities, healthcare requirements or your own dreams to fulfil that may require frequent redemption. Debt funds help you with that.

Every investor aims at a favourable asset allocation, i.e. having an ideal mix of all kinds of assets in his/her portfolio, assets like equity, debt, gold, etc. This is done so that there is a balance maintained in case one of the assets underperforms. Now, while equity mutual funds can give you a chance to create wealth over a long-term, debt mutual funds can provide you with relatively stable returns at a lower risk than equity funds. It can also provide you with the diversification your portfolio needs, allowing your asset allocation game to be stronger.

When compared with traditional investment instruments, debt funds score in terms of liquidity. They are liquid because they do not come with lock-in periods and hence, you can redeem the investments whenever you want with just a few clicks. Even returns from debt mutual funds on redemption prove to be more tax-efficient than most of the other instruments. Due to the indexation benefit, your returns are calculated not from the original value of the investment but from an indexed value, thereby reducing the capital gain for the purpose of capital gains tax calculation. You can read more about the tax efficiency

This will largely depend on what are the financial goals that you are trying to achieve with your investments. Liquidity and stability, as compared to equity fund and tax efficiency, are always welcome. But debt funds should play a particular and prominent role in your portfolio configuration. So, while investing in your 20s, when your purpose of investment in debt funds can be to invest for your upcoming marriage; as you grow older, the role of debt funds in your portfolio can be to create an emergency fund. These examples are hypothetical, of course, but the aim here is to help you find your own answers to the question - why invest in debt funds?

If you are ready to explore the world of debt mutual funds, do check the types of debt mutual funds here to choose the one that suits your requirements and begin your journey.