Why is debt mutual fund a good addition to your investment portfolio?

debt mutual fund

Typically, when people speak of mutual funds, they tend to talk of equity funds. While equity funds are a great investment option, there are also other types of mutual funds such as hybrid and debt mutual funds. Each type of mutual fund comes with its specific risk-return profile and helps investors meet different financial needs. And in this article, take a look at why adding debt mutual funds to your investment portfolio could be a smart decision.

1. Diversify and stabilise your portfolio

Experts always recommend having a certain exposure to debt instruments in your portfolio as the debt asset class has an entirely different risk-return profile when compared to the equity asset class. This allows you to diversify and stabilise your portfolio because even if the stock market is volatile and your equity investments suffer, debt funds that are safer and more stable can make up for it.

2. Low-risk investments 

Debt mutual funds invest in fixed-income securities such as corporate bonds and government bonds. These securities carry a minimal amount of risk and are not as volatile as the stock market. Hence, debt funds make for a great investment for when you want to park your funds with the primary aim of capital preservation while earning some amount of returns. Also, the returns offered by most debt funds tend to be higher than fixed deposits.

3. Various types of debt funds

Debt funds are categorised based on their investment horizon and the credit quality of their underlying securities. Hence, there are several types of debt funds, each with a different investment objective. For instance, a credit opportunity fund invests in securities with low credit rating as such securities tend to have a higher interest rate to compensate for poor credit quality. However, for a more conservative investor, there are debt funds such as gilt funds that primarily invest in government bonds.

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4. High liquidity and better accessibility 

One of the reasons why debt mutual funds make for a great investment is that they are highly liquid and offer better accessibility to a range of debt products. You can sell or redeem your debt fund units at any time, irrespective of the maturity of the underlying securities. At the same time, you can choose to invest in a debt fund of your choice through a Systematic Investment Plan (SIP) that does not require a lot of upfront capital for investment.

Wrapping up

Online mutual fund options include all types of debt funds, and you can easily invest in a debt fund of your choice depending on your financial goals and investment horizon. Debt funds make for a great addition to your investment portfolio because high exposure to equity investments can turn out to be detrimental and debt funds act as a hedge. Moreover, debt funds tend to provide regular income in the form of interest so you get the benefit of passive income also.

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