How important is it to include debt funds in your portfolio?

With diversification, professional management, and liquidity as its key features, investing in mutual funds can be a great way to grow your wealth. But along with growth, an investment portfolio also needs security against risk, so it’s equally important to consider adding a proportion of debt funds as part of your investment strategy.

Diversifying your investment portfolio with debt mutual funds can be a key strategy for managing risk, improving returns, and achieving your financial goals. And that’s just the start; keep reading to find out more benefits that debt funds bring to your portfolio and overall investment approach.

Get access to different types of debt funds

There are different types of debt funds, allowing you to save for different goals through flexible investment options. From short term debt funds providing relatively more stable returns to gilt funds that have longer tenure are available to meet each investor’s specific needs and goals.

For instance, if you have a short-term goal, such as building an emergency fund or setting aside finances for a family holiday, you might benefit from a short-duration debt fund. On the other hand, if your primary aim is to maximise returns while putting your money away for the long term, then investing in gilt funds would be suitable.

Maintain stability in your mutual funds investment portfolio

Investing in debt funds helps maintain stability in your portfolio as they are less dependent on market sentiments. These funds invest in commercial papers, treasury bills, certificates of deposits, corporate and government bonds that do not easily fluctuate like equities or stocks. However, this stability also means that debt funds may not generate returns like equities. As such, most experts recommend having both equity and debt investments to benefit from the potential growth of equity stocks while mitigating the risks with fixed-income securities.

You can liquidate your holdings easily

Debt mutual funds can be a worthy addition to any portfolio as they typically offer more liquidity than many other types of investments. Being backed by government and corporate bonds allows these funds to be sold off quickly and converted to cash when needed. This makes them ideal for those pursuing short-term goals while still wanting the potential for optimum returns that these funds can provide. However, it is important to check if there are any exit loads applicable, as this fee may affect your debt fund returns.

Ability to transfer funds to equity schemes through STP (systematic transfer plan)

With an STP, you can move money from one mutual fund scheme to another at regular intervals to build up your portfolio, diversify your investments and reduce volatility over time.

For example, if you invest in a low-risk debt fund but still want to benefit from higher returns associated with equity investments, you could use an STP to transfer funds from a debt scheme to an equity one periodically. This way, you get the best of both worlds, lower risk and higher potential returns.

Get instant access facility for more quick withdrawals

Debt fund investment provides an efficient way to manage your portfolio with regular income and high liquidity options. There are types of debt funds, like liquid funds and overnight funds, that offer instant access facilities, thereby allowing investors to redeem up to Rs. 50,000 instantly per day per scheme. Not only does this give investors greater liquidity with their money, but it also helps them manage their money better during sudden market fluctuations or other financial contingencies.

To sum up

While making investment in mutual funds, you can use different strategies to achieve your goals with minimum risk possible, including debt funds. By strategically adding these funds into your financial portfolio, you can balance against market volatility while ensuring you receive an optimised return on your investment. Also, it may be beneficial to seek professional financial guidance to develop a customised portfolio based on your age, risk appetite and current finances. A sound financial plan backed by expert advice can help you manage your expenses and investments more efficiently.