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Why Invest in Debt Funds? Are They Good for Your Portfolio?



Why Invest in Debt Funds Are They Good for Your Portfolio

Image by Pabitra Kaity from Pixabay

With the various available investment options, most people are more inclined toward investing in the one that provides high returns. Amid this, you might forget that your portfolio also needs an element of stability. And this is where debt funds are beneficial!

What are Debt Funds?

Debt funds are mutual fund investment schemes that generate fixed-income securities. These securities include Corporate Bonds, Money Market Funds, Debt Securities, Certificate of Deposits, Government Securities, Monthly Income Plans, Fixed Maturity Plans, Short Term Plans, Liquid Funds, and more.

All of these assets have a fixed interest rate and maturity date. And that’s why debt funds investment are considered to be some of the best investments if you want to add stability to your portfolio. Moreover, debt funds come in different categories with various tenures and risks.

Further, they are less volatile than equity funds. Hence, investors looking for stable investments and lesser risks can consider investing here.

What are the Benefits of Debt Funds?

Individuals who prefer investing in the lesser volatile equity market can consider debt funds an option. Here are six reasons why investing in debt funds can be beneficial for your financial portfolio:

1. Stability

Surely, a great portfolio should show wealth creation and growth. But these factors alone aren’t enough! It should also include stability, which is only available through debt funds.

They may give you low returns as compared to equity funds, but if you want to add the stability element to your portfolio, debt funds are a great choice to invest in. you are exposed more to debt rather than risky equity, and that can be your immediate milestone.

2. Regular Income

Creating regular income is not possible with an equity fund. There’s no guarantee of regular dividends from equity. But with debt funds, you can create a growth plan that can assure you a regular income.

Although taking out returns from the debt funds comes with tax implications, what’s more important here, is that you get a stable income from your investment.

3. Liquidity

One of the best features of investing in a debt fund is its high liquidity. You can withdraw your fund investment whenever you require, and it will reflect in your bank account within a day.

Liquidating other investment options like fixed deposits is a hassle. You have to go through extensive paperwork and not to forget, the heavy penalties you face. Compared to them, debt funds provide greater liquidity!

4. Flexibility

Flexibility is one characteristic that separates debt funds from other investments in your portfolio. Whenever you get an additional income, you can invest in the debt funds through the help of Systematic Investment Plans (SIPs). And by setting up a Systematic Withdrawal Plan (SWP), you can withdraw the debt funds according to your needs.

5. Tax Benefit

Debt funds are known to be fairly more tax efficient than other debt investments. For example, if you have your debt funds structured as a growth plan and hold the funds for more than three years, they will be labelled as long-term capital gains. And when this happens, you are taxed only 20% with taxation benefits on the entire return earned in the three-year tenure.

6. Reduced Risks

As priorities and situations change for everyone in their life, the risk factor also changes. You might have dependants relying on you or bills that need to be paid, and this is where adding a risk managing component to your portfolio is essential.

Debt funds are low-risk investments that are less volatile than equity funds. Investing in them can balance your portfolio and manage its entire risk factor.

Keep in Mind

Debt funds are known to make your portfolio more stable and predictable and show your investment flexibility. These fund investments are tax efficient and great for long-term investment plans!

However, no matter how less risky debt funds are for your portfolio, you need to keep in mind that they are a form of investment that carry risks.

For example, a change in the interest rates can impact heavily on your investment plan. Or the corporate bonds may collapse depending on the market situation. So, research before investing!

Naina Rajgopalan has a thing for numbers and a deep fascination to learn about all things finance. She’s been money-wise from a young age and has always shared her knowledge and tips with those around her. Being a part of the content team at Freo Save, digital savings account app that offers a 7% interest rate on savings along with benefits such as insurance on balance, safe & secure banking, and so on, Naina stays updated with the latest of what happens in the banking and fintech industries. She has taken it upon herself to share her knowledge with readers across all walks of life to help them manage their finances and budgets better, so they can make better decisions while spending, borrowing, investing and saving.

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