Why you need Debt Funds in your Portfolio

Why you need Debt Funds in your Portfolio

Importance of debt funds can be gauged from the fact that in current times when the markets are volatile, as prices of equities vary from day to day, debt instruments can be trusted for stability.

Planning your investment portfolio can often be a tricky thing. The primary objective that most individuals pursue is the growth of capital. Ask investors about what they desire from their investment and the first thing they will say is higher ROI.

But maximizing gains can be a bit tricky. Simply because there are many investment options that an individual has to deal with it. Choosing between equities, fixed deposits or even commodities like gold, etc. is often a tough choice to make. The issue is that the investment options that potentially give the maximum returns like equities are also fraught with risks which investors need to understand.

Thus, rather than just pursuing growth for the sake of it, investors need to take a rational and logical decision. They need to diversify the investment portfolio with a bouquet of options, ranging from high growth instruments like equities to relatively safer investment options like debt funds. Little wonder then, that one of the common rules of investment is that your investment portfolio must always include fixed-income products (like debt funds), no matter what your age is or how interest rates are moving.

The importance of debt funds can gauged from the fact that in current times when the markets are volatile, as prices of equities vary from day to day, debt instruments can be trusted for stability. Thus, an individual one must pick the right schemes based on past performance, areas of investment and his risk appetite. Typically the fund managers of debt funds generally invest in fixed income securities such as bonds, corporate debentures, government securities (gilts), money market instruments, etc. and seek to provide regular and steady income to investors.

But if fixed returns are an objective, then one may ask why not fixed deposits or FDs? Well, not surprisingly, the comparison between FDs and Debt funds is a very logical and common one, because both offer a degree of safety for the capital. But even though FDs seem more profitable, in terms of higher returns, it is the taxation on these returns that makes the essential difference. As the returns from FDs are taxed, debt funds can be a better option. Though mind you, with the latest changes, even returns from the debt funds are subject to tax cuts, but as the minimum tenure for long-term capital gains was extended from one to three years, investors that stay invested for at least three years, can benefit from lower tax on long-term capital gains.

Another big benefit of debt funds is the liquidity they offer. Typically, a debt fund is highly liquid, as investments can be withdrawn any time and the money is back in the account in a matter of few days.

Thus, the bottom line is simple, debt funds bring relative stability to your portfolio, they offer liquidity and most importantly, they do offer better returns than most other traditional saving instruments over a period of time.

Happy Investing

Source:Moneycontrol.com