When it comes to building a portfolio that can withstand ripples in the market and generate returns suited to your goals, the addition of debt mutual funds like corporate bonds can act as that extra layer of stability. Debt funds offer the best of both words – they help investors ride through turbulent market conditions and yet aim to offer better returns than traditional fixed income instruments such as fixed deposits. These qualities also make debt funds a suitable choice for investors for meeting short and medium-term goals.

While investors in equity mutual fund schemes seek to gain capital appreciation through investments in the equity stocks of companies that are highly prone to market volatilities, debt mutual funds aim to offer comparatively stable and low-risk returns that are usually better than fixed deposits. This is because debt mutual funds invest in instruments that provide a fixed rate of returns. Even though the rate of returns is not as high as that of equity funds, it remains a preferred option for risk-averse investors.

Since, fund schemes purchase debt instruments based on their credit ratings, it also helps investors gauge the risk entailed in a debt mutual fund investment. Credit ratings indicate the probability of the debt instrument to honour its interest payments and eventually, the principal repayment at maturity. The higher the rating of the selected debt instruments chosen, the lesser the risk of the mutual find defaulting on its payments to investors.

Our risk tolerance varies according to the changes in our life circumstances. Taking care of dependents, paying bills, saving up for children’s education and retirement and being prepared for exigencies – all these have a bearing on the risk appetite of investors. Debt funds can help you in evening out the risk element in your portfolio because they trade in the fixed income market which makes them a more stable option than equity funds that trade in the stock market. The low-risk and low-volatility means you do not have to wait for time to work its magic on evening out the market ups and downs as is the case with equity funds.

Another reason why debt fund investments are suitable for meeting financial goals varying between one to three years, and even lesser than a year because they offer better post-tax returns as compared to other debt instruments of comparable tenure. Ultra-short-term funds also generate high returns because of the lack of penalties on redemption before maturity, which is applicable on equity funds. The low maturity periods also ensures your investments isn’t vulnerable to drastic interest rate movements. Also, unlike other debt instruments wherein you have to wait for the investment to mature to get your principal and interest back, debt mutual funds afford you a lot of flexibility on that front. Debt mutual funds have schemes that are suitable for all investment horizons – be it 3 moths or 5 years, you can take your pick from a wide variety and what with no mandatory lock-ins, you can withdraw and invest as per your convenience.

Investor may opt for systematic investment route by investing in (Systematic investment Plans) SIPs in Debt funds. SIPs in debt funds can generate relatively good returns over long investment tenures. By investing through SIPs an investor may take advantage of volatility through the Rupee Cost Averaging of purchase price. Investors usually associate volatility with equity funds or instruments however fixed income can also be volatile due to changes in interest rate (yields) and credit spreads. SIPs also help in realizing your financial goals.

In a nutshell, if you are on the lookout for mutual funds that can help you achieve short-term goals, you can dabble with short-duration debt mutual funds that have investments in highly-rated debt instruments. You won’t have to worry about market movements and the short duration will immunize your investment from interest rate changes.

Disclaimer: An Investor Education Initiative by Mirae Asset Mutual Fund

For information on one-time KYC (Know Your Customer) process, Registered Mutual Funds and procedure to lodge a complaint, refer to the knowledge center section available on the website of Mirae Asset Mutual Fund

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.


IE Disclaimer

An investor education initiative by Mirae Asset Mutual Fund.

For information KYC process, Registered Mutual Funds and the procedure to lodge a complaint, refer knowledge centre section available on the website of Mirae Asset Mutal Fund.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.