Investing is the act of allocating funds into an investment plan or even depositing a part of your income into a bank account. When it comes to saving, there are two types of investors. Namely, those who invest in the market by opting to allocate funds to some investment plans. However, a lot of Indians to this day are known to consider a bank account, especially a fixed deposit (FD) as an investment option.
But, investing in the market is a recommended way to earn extra income and as a result, acquire enough wealth at the time of retirement. But not all investment schemes will help you to achieve your required retirement corpus. One of the ways you can acquire the wealth you require for retirement is through debt funds. One of the types of mutual funds, this variant is known for coming with a lot of benefits. But, before going through the merits, you need to learn about what are debt funds and how they work.
What are debt mutual funds?
This variant of mutual funds is the funds which are known for primarily directing investments to debt and money market instruments. The target of investments in debt funds includes things like commercial papers (CPs), treasury bills (T-Bills) and certificates of deposits (CDs). Non-convertible debentures i.e., NCDs and government bonds are prominent examples of debt market instruments. Debt funds are considered an ideal investment choice if your financial goal is to acquire a steady income for the future.
How do debt funds work?
The professional managing your mutual fund portfolio referred to as a fund manager allocates funds to assets such as debt or money market instruments. This action is undertaken with only one aim. The said aim is to enjoy income in form of interest payments. In firm contrast to equity mutual funds, debt funds are known for coming with significantly lesser risks and this is the factor that attracts investors to these funds. Furthermore, there are some variants of debt funds that can help you to invest even for one day or for some months. For example, overnight funds are funds that are known for allocating funds in instruments which mature overnight. Apart from overnight funds, liquid funds are known for allocating funds in securities that mature in less than 91 days.
What are the merits of investing in debt funds?
Here are some of the different merits that are associated with debt funds:
- Debt funds are known for coming with low risks:
Debt funds can be the perfect solution for conservative investors who are seeking capital appreciation with low risks. As the fund allocation in these funds is directed towards fixed-income securities that are known for coming with fixed rates of interest and maturity periods, debt funds are known for being immune to market volatility. Hence, the choice of opting to add these funds to the portfolio with some equity funds results in the balancing of the risk-return profile. Debt funds act as a hedge against market volatility whenever equity funds are underperforming.
- They are helpful for short-term goals and emergency funds:
Debt funds are also known for being suitable as an investment avenue to invest your surplus money and thereby earn some interest on it. These funds are known for usually offering higher interest rates than conservative schemes like bank accounts and hence, they can be of great help for fulfilling short-term goals. Moreover, you can park your money in debt funds to create an emergency fund that can be helpful to deal with incidental financial crises.
- These funds are known for being flexible:
A common misconception about the action of investing is that one needs to have access to a huge sum of money for making a lump-sum investment. However, you have the choice to make a small amount of fund allocation through SIPs i.e., systematic investment plans. This makes these funds flexible in nature.
- Debt funds are known for being liquid:
Another major benefit of debt mutual funds is that they are easy to liquidate, i.e., you can choose to redeem them anytime you want. Redemption in debt funds is easier than the other fixed-income investment avenues. For example, FDs i.e., fixed deposits are known for often coming with lock-in periods and penalties in cases of premature withdrawals. Debt funds have no such lock-in period and hence, offer high liquidity.
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