One important thing that determines your investment choices is your risk appetite. Your risk appetite defines the amount of risk you can afford to take in an investment. The primary risk in an investment is losing money due to market fluctuations. Market risk is the highest for equities and equity mutual funds, even though their return potential is higher. But if you are a risk-averse investor, you may want to look for options with lower market risk. Debt mutual funds are a wise option here. Let us learn more about debt mutual funds and see if you should consider investing in them.
What are debt mutual funds?
Debt funds invest in income-producing assets such as treasury bills, commercial papers, corporate bonds, government securities, and other money market instruments. The debt fund invests in securities with a predetermined maturity date and interest rate. They are considered a low-risk investment since their rewards are independent of market fluctuations.
A credit rating is assigned to every debt instrument to assist you in determining how likely it is that the debt issuer will be unable to make timely payments of principal and interest. Fund managers use these ratings when evaluating a debt instrument to get a sense of its quality. If the debt instrument issuer has a good credit rating, then there is little chance it will fail on its debts.
Who should invest in debt mutual funds?
If you have a low tolerance for risk, you can consider investing in a debt fund. Debt funds make investments in various assets and provide consistent yields. They typically provide returns within a range. Because of this, they appeal to risk-averse investors.
Debt funds could also work for you if you are an investor with a short-term time horizon of between 3 and 12 months. Then, instead of parking your money in conservative options, you could invest in a debt fund to earn returns of more than 7% in most cases.
FDs vs. Debt funds
Most investors with a medium-term investment perspective (three to five years) often see bank fixed deposits (FDs) as their go-to safe investment choice. However, investing in a debt mutual fund could give you similar returns. Also, there is potential for a comparatively higher return too.
Advantages of debt mutual funds
· The stability of your investment portfolio may be improved with the aid of fixed-income mutual funds. This benefit means that investors in the top debt funds may count on consistent returns and access to regular interest payments.
· The comparatively high liquidity of fixed-income and debt mutual funds in India is one of their primary benefits. You may request a withdrawal from your debt fund at any moment, and the money will be sent to your bank account within 24 hours. When money is needed quickly, debt financing might be a lifesaver.
· Deferring annual taxation is another perk for debt funds. Withdrawals from a debt fund account trigger taxation. However, indexing and lower tax rates on returns are available.
Debt funds remain a good alternative in India when looking for a lower-risk investment with higher returns. At the same time, ensure the investment option matches your goals before investing.