Is Investing in Well Diversified Debt Funds Smarter?

The COVID-19 pandemic made people realise that the income from their full-time employment is not enough for their long-term sustenance. As work from home became the norm, and life, in general, became unstable, people found solace in little distractions.

However, over time, people found out that they overspent on distractions. That’s when some folks started investing. Investing can be defined as the action of allocating funds to investment plans.

To invest, firstly, one needs to select an investment scheme. One of the investment schemes that might help you accumulate wealth over time is mutual funds. Furthermore, mutual fund scheme are not a monolith and are known for coming with several variants. One of these different variants is debt mutual funds.

In these funds, the fund manager chooses to allocate a significant portion of your money to fixed-income securities like money market instruments, government securities, corporate bonds, and debentures. Listed below are some of the reasons why you should consider allocating a part of your income to a debt fund:

1. Market fluctuations may not impact performance:
As mentioned before, in debt funds, the fund manager chooses to invest money into fixed-income securities such as commercial papers, corporate bonds, treasury bills, and government bonds. These instruments are known to generate income for investors at regular intervals.

Moreover, regardless of the market condition at a particular period, it may not impact income generation through debt mutual funds. If you opt for a debt fund and the market is not performing very well, the market’s low performance may not impact your finances.

2. Debt funds may offer regular income to their investors:
This type of mutual fund scheme directs investments towards government securities, treasury bills, corporate bonds, commercial papers, and other money market instruments. Opting for fund allocation in these securities is considered a prudent choice as they may generate regular income for their investors.

Also, there are some periods when the fluctuations in the market may not impact the income of debt funds. This is why some might consider debt funds a smart investment option.

3. Debt funds are known for being flexible in nature:
Debt funds may be a solution if you seek an investment option that offers flexibility. These schemes are known to allow you to move your money to different funds. It is possible to move funds to various sectors in debt funds with the help of a systematic transfer plan, i.e., STP. By putting this to good use, you will have the option to pay through a lump sum mode or systematically transfer a small portion of your money into equity at regular intervals.

4. Debt funds are known for being liquid:
In stark contrast to numerous investment options available in the market, debt funds don’t have any specific lock-in period. Imagine that you signed up for an investment instrument with a lock-in period. If a situation arises in which you are in urgent need of cash before its maturity period, you can’t redeem your investments and will be required to wait until the end of the maturity period.

Conversely, if you opt for debt mutual funds and want to liquidate them, you can do so easily. However, before liquidating it, please check if an exit load is levied. An exit load can be defined as a charge you will be required to pay if the fund is liquidated before it reaches maturity.

5. These funds are known for coming with natural diversification:
Imagine this hypothetical scenario; you are seeking an investment scheme that can invest on your behalf in the stock market. If you seek an expert’s opinion that might help in accumulating income in the long term, one of the investment schemes mentioned in the said opinion might be debt funds. Another feature of these funds is that they come with natural diversification.

Diversification, in the world of investment, refers to a process in which your funds are spread across a wide range of sectors instead of being invested in one place. Diversification may act as a cushion against the losses that may be incurred from low-performing asset classes.

Are Debt funds a prudent investment choice?
As stated before, debt funds are known to provide natural diversification. This means that the losses incurred from one underperforming asset class might be cushioned by the revenue generated by other performing ones.

Apart from diversification, debt mutual funds are known for allocating funds to fixed-income securities. As they invest in fixed-income securities, they might generate income for their investors at regular intervals, making them a prudent choice for investment.

Statutory Details: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC). Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme. This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.