Debt funds are beneficial for investors who want to invest in a relatively low-risk mutual fund scheme. They are also aneffective way to diversify your portfolio and reduce overall risk.
Debt funds are mutual funds that invest in fixed income securities such as treasury bills, debentures, and commercial papers. They span across different time horizons and risk profiles. They range from short-term options, like overnight funds and liquid funds, to longer-term options like gilt funds. Regardless of the time horizon, debt funds can be a good investment option.
Following are the most common debt fund investment myths that you should know.
1. Debt funds are as risky as equity mutual funds
Fact: Debt funds are less volatile and carry lower risk than equity funds, as they invest in debt instruments such as government securities, certificates of deposits, and corporate bonds, among others. They are also not directly linked to equity. However, debt funds are associated with other risks such as the risk of default (i.e., the company being unable to repay the debt) and interest rate risk (i.e.,price of bonds is impacted by the change in interest rates).
2. Debt funds never generate negative returns
Fact: Debt funds generate returns for the investors through the interest earned on the debt instruments holdings and via the price change of the securities (i.e., capital gains). However, since bond prices also contribute to the fund’s value, a debt fund can generate negative returns if the bond prices drop. For instance, a rise in interest can cause debt funds to generate negative returns.
3. Debt funds are not for retail investors
Fact: Some investors have a notion that debt funds are not a viable option for retail investors. However, looking at the inherent advantages that debt funds offer retail investors, they are a great choice for retail investors.
Debt funds can beviewed as auseful option for investors looking for low-risk investment schemes.
4. Debt funds generate only interest income
Fact:Debt funds generate interest income and capital gains. Debt funds invest in debt; so, when the price of a debt security increases, it generates capital gains for the fund. Thus, capital gains may help the fund deliver additional returns.
5. Debt funds are only for conservative investors
Fact: It is inaccurate to assume debt funds arefor conservative investors. They can help diversify portfolios for investors with relatively higher risk appetites too. Debt funds also offer opportunities for investors with greater risk tolerance within the debt markets.
For instance, long-duration funds can carry higher interest risk and deliver higher returns than most other categories of debt funds. However, they are more suitable for investors with higher risk appetites and a longer time horizon.
It has never been easier to invest in debt funds and the other mutual funds in India. However, some investment myths that hold people back from investing in debt funds.
Before you invest, think about your financial goals and your risk appetite. Create a roadmap to help you achieve these goals while aligning the strategy with your risk appetite. If you have decided to go the SIP route, you can also use a
to determine your investment amount andthe overall timeline for achieving your financial goals.
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