If you do a general search on Google about how much exposure your investment portfolio should have to which type of assets, it will come up saying that if you are 30 years old then you must have around 70% exposure to equity and 30% exposure to debt. Results may also show at if you are a 60-year-old then you must have around 60% exposure to debt and the rest to equity. These calculations as usually made based on the 100 Age Formula and although they are not scientifically proven when they imply is that a younger you can take more risks as opposed to the older one.
What it also implies is the importance of debt investments in one’s investment portfolio.
Debt mutual funds
Although there are other ways to invest in debt instruments like through PPF, bank FDs or post office, debt mutual funds are probably the best way to seek exposure to fixed income securities. A debt mutual fund is an open ended scheme that invests in fixed income securities and money market instruments. Of its total assets, a debt fund may invest anywhere between 80% to 100% in treasury bills, government and corporate bonds, commercial papers, CBLO, cash and cash equivalents, reverse repo, etc.
Here are a few pointers that lay emphasis on the importance of having debt funds in your investment portfolio –
Debt funds offer stability
Most young investors focus on their portfolio’s growth and wealth creation while giving less importance to stability. However, it is equally important to ensure that your investment portfolio has the much-needed stability, and adding some debt funds can do that. Debt funds may not be as rewarding as some equity funds, but they might be an investment tool that plays a vital role in generating low but stable income.
Balance portfolio risk
Every individual’s risk appetite varies based on their age, and as one grows older their risk appetite is bound to shrink down further. Thus, investors are going to ensure that their investment portfolio comprises debt assets throughout so that they can manage investment risk that prevails as long as their money is invested in various assets like equity, debt, gold, etc. If you compare debt investments, they are far less volatile than equity which is considered an unpredictable market. This is the reason why investors must consider debt funds, as they can reduce the portfolio’s volatility.
You may focus on equity oriented schemes like large cap funds or ELSS, but you need also remember that your portfolio should maintain liquidity. Tax saving schemes like ELSS (Equity Linked Savings Scheme) come with a three year statutory lock-in period. You need to ensure that you are able to liquidate your assets in case of an unforeseen exigency. Adding debt schemes like liquid funds can be a good option as here the money is almost instantly transferred to your registered bank account after you withdraw your investments.
Choosing the right debt scheme
As of now, there are 16 different categories under the debt mutual fund schemes gamut. For someone who is new to funs funds, making an investment decision can be quite overwhelming. Investors may reach out to their financial advisor who might help them make an informed investment decision. Also, investors need to understand their goals, the investment time horizon, and risk appetite as well before investing. Debt funds carry risks like credit rake risk and interest rate risk. It is essential to ensure that you invest in a debt fund that invests in high credit-rated securities, especially if you are someone who is risk averse.