Some people think that the income from their job will be enough for their long term sustenance. But that is a huge misconception, as inflation will eat up their savings. That is where a financial plan comes in. In the market, numerous investment tools such as mutual funds and debt mutual funds are available. In the latter, investors put a significant portion of their money on fixed income securities like debentures, money-market instruments, government securities, and corporate bonds. Listed below are six reasons why you should consider allocating a part of your income to a debt fund:
1 Offers stable yields:
Consider this scenario. After entering the job market, you decide to invest in the market. If you are looking for an investment tool that may provide you with income at regular intervals. Here, debt funds might just be helpful. In this type of fund, investments are made on securities like corporate bonds, government securities, treasury bills, commercial papers, and several other types of money market instruments. Investing in these securities is considered prudent as they generate regular income. Most of the time, the fluctuations in the market may not have an impact on the income of debt funds. Therefore, they are considered a smart investment option.
2 Reliable option for tax-efficient purposes:
This type of mutual fund is considered a prudent investment option if you are looking for tax-saving opportunities. For example, to take the first step in your investment plan, you invest in a debt fund. So, after a few years, it reaches the maturity period. It is only at the time of withdrawal that you need to pay tax and not before it.
3 Performance is not impacted by market fluctuations:
As stated earlier, in debt funds, the portfolio managers invest money into fixed-income securities like treasury bills, commercial papers, corporate bonds and government bonds. These instruments are known for yielding money to investors, regularly. Regardless of the market condition, it will not impact income generation via debt funds. In case you opt for a debt mutual fund and the market is not performing very well, don’t worry, the market’s low performance may not have an impact on your finances.
4. It ensures that the portfolio remains stable through diversification:
Consider this; you have hired a fund manager to help you with your investments in the stock market. When you ask for the best option for earning income in the long term, you will be told that the best option, in that case, will be investing in debt funds. After opting for it, you will learn that the best way the manager will help you reach the goal is by diversifying your money. Diversifying, in the world of investment, means that your funds are invested in a wide range of sectors instead of them being invested in one place. Doing so helps you cushion the loss that may be incurred from a low-performing sector.
5. They are very flexible in nature:
If you, as an investor, are looking for an option that is flexible in nature, you need not look further than debt funds as they offer you the option to move your money to different funds. Moving funds to different sectors in debt funds is possible with the help of the systematic transfer plan i.e., STP. With its help, the investors will have the option to invest their funds either in a lump sum amount or systematically transfer a small portion of their money into equity at regular intervals. Doing this helps the investors to spread out the risk of equities instead of putting all the money in one place. This is one of the reasons why seasoned investors and a knowledgeable fund manager will advise you to opt for a debt fund. This option offers optimum flexibility to investors.
6. If you are looking for liquid options, debt funds are ideal:
Debt funds, unlike numerous investment options available in the market, don’t have any specific lock-in period. So, in case you have opted for an investment instrument with a lock-in period, and you are in urgent need of cash before its maturity period, you may have to pay a penalty (i.e., exit load) on premature withdrawal. However, if you have opted to invest in debt funds and want to liquidate it, you can do so easily. But before liquidating it, please check if there is an exit load i.e., a charge that will be deducted if the fund is liquidated before it reaches the maturity period.
Hopefully, you have learned enough about debt funds. In case you want to learn more, you can contact a fund manager as soon as possible.
Disclaimer: Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.