The Many Benefits Of Investing In Debt Funds

by Shashank Bhaskar Finance Adviser

Debt funds typically invest in market instruments like corporate bonds, government securities, certificates of deposits, commercial papers, and similar other money market instruments. A debt-oriented fund is called so since issuers of these instruments basically borrow money from lenders against the instruments. Debt based funds generally come with varying maturities and have the potential to generate income, both periodically and/or at maturity. Here are the many benefits of investing in this mutual fund.

It allows you to diversify your investment portfolio

Any seasoned investor will tell you that the share market is indeed a volatile place. You may think that you may have predicted the movement of a certain stock or fund, but a simple change on the national or global level can render your investment unpredictable. This is why it is important to always diversify your investments, and the best way to diversify your investment is to include a debt mutual fund in your investment portfolio. By investing in debt funds, even if it is a small portion of your assets, you are shielding your portfolio from the volatile equity investments market.

It allows you to mitigate your risks

Debt oriented mutual funds are considerably less volatile when compared to equity based funds. They are far more stable and the returns you can earn can be predicted much clearly than most other mutual fund options you may have. Therefore, whether you are a conservative investor or someone who has a higher risk appetite, it could be beneficial for you to invest in debt based funds since they have the capacity to reduce the risks associated with market losses; something you cannot escape completely if you decide to invest in the share market. Debt based funds allow you to calculatedly mitigate your investment risks which is why they are a must in every investment portfolio.

You can pick and choose from a wide range of funds

The great thing about investing in debt based mutual funds is that you can pick and choose from a wide range of funds belonging within this single category. These include income funds, dynamic bond funds, liquid funds, gilt funds, short and ultra-short-term funds, credit opportunity funds, etc. You can decide which funds to invest in based on your risk appetite and the fund’s performance in the last few years. Also, consider the fund manager and how successfully he has been managing the fund.

You can earn a regular income

Debt oriented funds prove to be a great investment instrument for people who which to generate an additional, regular source of income. This is because these funds have the capacity to generate an additional flow of cash through dividend distribution. Depending upon the fund you’ve invested in, you can earn dividends on a daily, weekly or monthly basis.

You can easily park your short-term surplus

Another thing to know about debt funds is that some of these funds provide retail investors the opportunity to park their surplus funds for a short period of time and even earn a decent profit on the investment. This is highly unlikely in the case of equity based mutual funds which are much more volatile, if you consider short term investments.

Final word: The above-mentioned reasons make debt-based funds a favourite among seasoned investors. Now that you know the benefits, you can invest in debt mutual funds. If you are a new investor, you must consider hiring the services of a financial advisor before you begin investing.