Debt schemes are a favourite investment choice of senior citizens mostly because they are known to offer regular interest. However, debt funds are an ideal investment choice not just for elder investors, but also for anyone who wishes to add the right type of diversification to their investment portfolio. If you are a seasoned mutual fund investor, you must be aware about the fact that it is foolish to depend on only one asset class for income generation.It is less likely for all the asset classes to either outperform or underperform in tandem at the same time. If one asset class falls, investments in other asset classes generally tend to even out the overall portfolio’s losses.
That’s not it. Here are 8 reasons why investors should start investing in debt funds –
- Low volatility
Debt Funds aim at generating income by investing in fixed income securities like government / corporate bonds, company fixed deposits, call money, treasury bills, debentures, etc. Debt instruments are known to mature over a stipulated time period, thus offering regular interest to investors. This makes them far less volatile as compared to equity funds.
A well-diversified mutual fund portfolio is essential for anyone who wants to reduce the overall risk factor. This is why most mutual fund advisors recommend investors to diversify their mutual fund portfolio with the right mix of asset classes.
- Ideal for parking money
If you have lumpsum capital sitting idle in the savings account, you can invest it in a debt scheme and stand a chance of earning decent interest over the short term. Debt schemes are known to offer decent interest rates as compared to savings account and if you have large surplus which you want to park somewhere for a short span of time, you can invest it in debt funds.
- Debt funds offer liquidity
Unlike some equity funds like ELSS which come with a statutory lock in period of three years, debt funds do not come with any such lock in period. This means debt fund investors can buy or sell units on any working day depending on their income needs. Debt schemes add liquidity to an investor’s mutual fund portfolio.
- SIP investment option
Debt fund investors have the option of starting a SIP. Systematic Investment Plan (SIP) is a way to invest in debt funds. If you wish to inculcate the discipline of saving regularly, you can consider starting a SIP in debt. When you start a SIP, every month on a fixed date a predetermined amount is debited from your savings account and electronically transferred to the debt fund. Investors can even start, stop or skip SIP as per their convenience.
- Option of growth and dividend plan
Depending on the investment objective, investors can decide whether they want to go with the growth plan or dividend plan. Those seeking regular income generally go with dividend plan. But if you wish to remain invested for the long term and earn long term capital gains, then growth plan might work in your favour. When a debt scheme makes profit, instead of distributing dividends, the profits are invested back in the growth scheme.
- Achieve short term goals
Debt schemes are ideal for targeting an individual’s short term financial goals like renovation of their house, planning a short vacation, making the down payment of their luxury car, etc.
- Choose from multiple debt schemes
Thanks to categorization of mutual funds by SEBI, investors can now distinguish between different debt schemes and make an informed investment decision. Depending on their investment objective, existing liabilities, age and risk appetite investors can choose from a plethora of debt schemes available.