We generally tend to overlook investing in debt funds before of the fact that it offers reduced returns as compared to investments in equities. It may however be noted that debt funds are a really good and vital investment instrument. Also, people who invest their money should take the time to find out the different aspects of debt funds which make it a relevant investment option.
We need to remember the fact that debt fund investments offer better tax-adjusted and more spread-out returns as compared to a large number of fixed-income investment options available in the investment market. It is particularly important for people falling in the ‘above 20 percent income tax slab’ to give relevant deliberation to debt funds. Debt funds come with credit risk and fluctuations in interest rates. These two forms of risks however tend to minimize to nearly nothing after the debt funds are held for more than 3 years. Debt funds contain a combination of fixed income assets and hence the above risks get limited from the very beginning.
Listed below are the top 5 reasons why investors should put their money into debt funds.
- Increased and easy liquidity
We can never predict when we may be in dire need of money; it can be a medical emergency, car repairs, home disaster, etc. However, if and when such emergency does arise then one has to have resources from where money can be gathered in a short period. Debt funds can be redeemed whenever you want and hence the perfect place where you can put your reserve money needed for emergency purposes.
- Diversified investments
It is important for all investors to maintain a portfolio that is well diversified. Thus, it is important to invest in debt funds as they offer steady and less volatile returns as compared to investments in equity funds. Diversification of the portfolio via investments in debt funds thus decreases the overall risk associated with your investment portfolio.
- Regular and stable income
Individuals who want to put their money into instruments that offer regular income should definite go for debt funds as such funds are the perfect match for them. We can select the option of dividend payout available with debt funds and thus receive a regular income. Another method to get regular stream of income via debt fund investment is by selecting the systematic withdrawal plan (SWP), which is the opposite of SIP. The SWP option permits investors to take out the appreciation of capital or a fixed amount on a periodic basis from the large amount invested in debt funds.
- Reduced risks
All of us want to invest in instruments that offer fairly good inflation-defeating returns in addition to tax benefits. Out of all such products available in the market, debt funds are regarded to be the one with lesser risks. The current rate of inflation is about 4 to 5 percent. Thus, receiving a return of about 7 to 8 percent via investments in debt funds can be considered to a good deal since debt investments come with reduced risks as compared to equity fund investments. It may be noted that returns in the short-term with equity funds can even pass into the negative. Hence, it is a better option to select the correct (debt) fund, particularly if you are nearing accomplishment of your financial goals.
- Predictable and as expected returns
People who have financial goals or targets that they plan to fulfill over a short-term period, i.e., in 1 or 2 years, have to go for debt funds as they are the best instrument for achieving such goals. As compared to equity funds which are dependent on market volatility, debt funds are fairly stable. Additionally, investors will get returns that are expected and predictable, which in turn will help you fulfill your plans of reaching a specific financial objective.