Debt funds deserve a place in your portfolio
The importance of debt investments may be overshadowed by the daily noise around equity, but investors need to keep in mind that no portfolio is complete without the inclusion of debt.
Debt imparts stability to a portfolio. The extent of debt in a portfolio, though, depends on the risk profile of the investor, i.e., whether conservative, moderate or aggressive, and the overall financial environment.
Debt imparts stability to a portfolio. The extent of debt in a portfolio, though, depends on the risk profile of the investor, i.e., whether conservative, moderate or aggressive, and the overall financial environment.
A pillar for financial planning
Traditional fixed income products may offer capital safety but they come with certain limitations. After accounting for tax and inflation, these avenues may not be sufficient to meet financial goals.
Fixed income funds, on the other hand, are subject to low volatility, provide reasonable liquidity, and give relatively better inflation-adjusted returns compared with other alternatives.
That said, the net asset value of a fund changes in line with the interest rate movement of the underlying fixed income instruments, rating changes of underlying issuer holdings etc..
These funds can be considered as a worthy alternative to traditional fixed income products as they come with some distinct advantages:
- Interest from debt offers a periodic income
- A choice of capital market debt instruments or debt fund categories also offer potential capital appreciation
- They reduce risk with diversified investments
For representation purpose only
Diversified palette of fixed income funds
Debt mutual funds are an effective medium for potential wealth creation, especially for those who are relatively risk averse in nature. They are slowly emerging as a better alternative to traditional fixed income instruments.
Moreover, debt funds offer a choice of instruments under their umbrella (see table below). This gives investors the opportunity to explore multiple investment options.
Source: Securities and Exchange Board of India (SEBI)
* excludes AA+ rated corporate bonds
Summing up
Debt funds are becoming increasingly popular as investors look beyond traditional fixed income instruments.
To reiterate their many advantages, these funds provide a better investment avenue than traditional fixed income instruments, lend stability to a portfolio, and seeks to offer higher post-tax returns.
Investors should, however, choose funds that match their investment objective, risk profile, and taxation needs amongst others and take an informed decision before investing in these.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
An investor education and awareness initiative by SBI Mutual Fund
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