13 Jan 2023
You may have heard about the importance of being disciplined with your investments and asset allocation – what does it mean?
Asset allocation means building your portfolio using a mix of asset classes to suit your financial goals, risk appetite and investment horizon, among other things. Various asset classes include equities, fixed-income instruments, commodities, real estate and alternative investments.
But when thinking of investments through mutual funds, one often tends to associate it with equities, overshadowing debt funds.
So today, let’s talk about debt funds – what are these, where do they invest, why you can consider investing in them, and what are the potential benefits for you as an investor?
This category of mutual funds generally invests in debt instruments which include government securities, commercial papers, certificates of deposit, and corporate bonds, among others.
So when investing in a debt fund, you are basically buying a portfolio of bonds or debt instruments or fixed income instruments, which generally pay a coupon at pre-defined fixed intervals – and these coupons are a percentage of the face value of the instrument.
But why should you consider investing in these funds?
Diversification – investing across asset classes can help you deal with the volatility a particular asset class may be going through, which could impact its performance.
Debt funds are also tax efficient because investors who have held on to their investment in debt funds for 36 months or more can benefit from indexation.
Indexation takes into account inflation during the holding period, and usually adjusts the cost of acquisition accordingly, which ultimately lowers the gains made for the purpose of taxation.
Debt funds can also be potentially beneficial for investment as they are relatively safer, as in case of equity funds the risk profile is usually higher.
What’s more, debt funds also offer higher liquidity as compared to traditional investment options like fixed deposits, making them more easily available in times of need. Because of this, investors can consider using debt funds for building an emergency corpus [PB(K1] as well.
So, when are you investing in a debt fund?
This article may include views and/or statements/opinions which contain words or phrases such as "will", "believe", "expect" and similar expressions or variations of such expressions, that are forward-looking statements. Actual results may differ materially from those suggested by the forward looking statements due to risks or uncertainties associated with the statements mentioned with respect to but not limited to exposure to market risks, general and exposure to market risks, general economic and political conditions in India and other countries globally, which have an impact on investments, the monetary and interest policies of India, inflation, deflation, unanticipated turbulence in interest rates, foreign exchange rates, equity prices or other rates or prices etc. Past performance may or may not be sustained in future. Investors may consult their financial experts before making any investment decision. Investors may seek advice from their tax advisors for specific tax implications.