Debt funds give superior tax adjusted and diversified returns than most fixed-income alternatives.
We often ignore debt fund investing only because it gives lesser returns compared to equities. However, debt funds are an important instrument of investment and as an investor one should always figure out what are the factors that make these funds relevant to invest.
Anil Rego, CEO, Right Horizons said debt funds give superior tax adjusted and diversified returns than most fixed-income alternatives. They should be especially given due consideration by those above 20% income tax bracket. Debt funds are exposed to credit risk and interest rate risk. “However, these two risks diminish greatly once the holding period is over 3 years. Since debt funds hold a basket of fixed income assets, both risks are contained from the word go,” he said.
Here are 5 reasons why you should invest a debt Fund:
Diversification
Debt funds are an important component of a well-diversified portfolio as their returns are typically more stable (less volatile) than equity funds. Thus, diversifying via debt funds reduces the overall portfolio risk.
High liquidity
Under some circumstances, you may not know when the need for money arises. But when it does arise, you may need the money at short notice. Debt funds are the ideal place to keep your emergency reserve as it can be redeemed at will.
Regular income
Abhinav Angirish- Founder-www.investonline.in said debt funds are ideal investments for people who are looking for investments to generate regular income. In debt funds, one can get regular income by way of choosing dividend payout option. “One more way to generate regular income from debt funds is to opt for SWP or systematic withdrawal plan which is the reverse of SIP. It allows you to withdraw the capital appreciation or a fixed sum on a regular basis from a large sum of investment,” he said.
Predictable return
If you have got a target or a goal, which you are planning to achieve in the short-term, say for one year or 2 years, then debt funds are the ideal place to invest. “Debt funds are less volatile when compared to equity funds. Also, you will have predictable returns which help you plan and achieve your objective or goal,” said Angirish.
Less risky
Debt funds are considered to be less risky when it comes to investing in a product which can give decent inflation-beating returns along with tax benefit. Currently, the inflation rate is around 4-5% and getting a return of around 7-8% through debt investing is not a bad deal as it is less risky than the equity fund investing. Equity investing for short-run can even go negative as well. So, better choose the right fund if your goals are nearing to get accomplished.
