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.
Wrapping UP
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
SIP calculator
to determine your investment amount andthe overall timeline for achieving your financial goals.
Disclaimer:
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Disclaimer:
The SIP calculator results are based on an assumed rate of return. Please get in touch with your professional advisor for a detailed suggestion. The results are based on an assumed rate of return. The calculations are not based on any judgments of the future return of the debt and equity markets / sectors or of any individual security and should not be construed as promise on minimum returns and/or safeguard of capital. While utmost care has been exercised while preparing the calculator, NIMF does not warrant the completeness or guarantee that the achieved computations are flawless and/or accurate and disclaims all liabilities, losses and damages arising out of the use or in respect of anything done in reliance of the calculator. The examples do not purport to represent the performance of any security or investments. In view of individual nature of tax consequences, each investor is advised to consult his/ her own professional tax/ financial advisor before taking any investment decision.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
