There are several mutual fund types each of which have a unique investment objective and asset allocation strategy. Those who are new to mutual funds, they might find it quite tasking in choosing the right type of scheme. This why it is better to do some research and understand the qualities and features of all fund types before making an investment decision.
Most financial advisors recommend investors to make a financial plan. The very first and important step of financial planning is determining your life’s immediate as well as long term goals. Having a clear perspective might help investors with a clear investment objective. If you carry some risk appetite and do not mind investing your money in market linked schemes, you can consider investing in mutual funds. But not all mutual funds invest in the stock market and it is necessary for people to get this notion out of their thought.
If you wish to earn returns by investing in mutual funds but do not want to expose your finances to market volatility, you can consider adding debt funds to your investment portfolio.
What is a debt mutual funds?
Out of the many mutual fund categories, equity and debt funds are some of the most sought after investment avenues. While equity scheme invest majority of its investible corpus in equity and equity related instruments, debt funds are mutual funds that aim at generating capital appreciation by investing in fixed income securities. The debt fund manager builds a portfolio of fixed income securities that generally have a short maturity period. The investment objective of most debt fund is to offer stable returns with minimum investment risk.
Investment portfolio of a debt scheme doesn’t get affected by equity markets. Here’s why
Depending on the investment objective and asset allocation strategy, the underlying securities of a debt fund may vary. For example, a liquid fund invests in securities that mature within 91 days. A short term fund invests in fixed income securities and money market securities such that the duration of the fund portfolio is between 1 and 3 years. Some of the debt securities and money market instruments in which a debt fund invests are treasury bills, government bonds, commercial papers, debentures, GOI securities, cash, and cash equivalent etc.
Debt funds aren’t entirely risk free. Yes, it is true that the underlying securities that comprise of a debt fund portfolio doesn’t get affected by the fluctuations in the stock market. That is because debt funds do not invest in equity and equity related instruments. However, they do invest in fixed income securities and debt instruments that are prone to interest rate risk and credit risk. A debt fund which invests in AA- or other low credit rating bonds may get affected if the company isn’t able to repay credit on time. A spike in interest rates can affect the performance of debt instruments as well.
Debt funds are ideal for those who have an investment horizon of 12 to 24 months. Investors can either make a lump sum investment or start a monthly SIP in a debt scheme of their choice. Systematic Investment Plan (SIP) is the simplest way of investing a fixed sum at regular intervals in debt funds. SIPs are also ideal for anyone who wish to inculcate the discipline or systematic and regular investing. Retail investors can also refer to SIP calculator, a free online tool that let’s you determine the gains that you may receive at the end of your SIP investing journey.