Is It a Good Choice to Invest in Multiple Debt Funds?

We as hard working individuals are constantly trying to improve our existing financial condition. Which is why most of us turn to investing opportunities so that we can put our savings to better use. Investing is indeed a better choice to give your savings a chance to grow. If you do not know how to make the most out of your savings, it is better that you make a financial plan. Financial planning isn’t as complicated as it sounds, in fact, it is as simple as managing your money and making the right investment choices. If you want to understand your short term and long term financial goals, make a financial plan. Not only will it help you prioritize your investment goals, but it also helps you understand how much capital you need to start the initial investment.

If you have long term goals like retirement planning or buying your dream home or building a corpus to secure your child’s future, you may need to have a long term investment horizon. Also, those with long term goals generally prefer investing in equity related instruments as equity investments as considered to perform better over the long term. However, since equity schemes invest predominantly in equity related instruments they carry a higher risk profile too. Which is why investors as always expected to determine their risk appetite before investing in their hard earned money in any type of scheme.

If you are someone who does not wish to invest in schemes that are equity oriented but still seek capital appreciation from avenues that do not offer fixed interest rates, you can consider investing in debt mutual funds.

What are debt funds?

Earlier there was a huge misconception among a large number of Indian investors pertaining to mutual funds. Most people believed that mutual funds and equity funds are one and the same and hence were hesitant to invest in such market linked schemes as they felt every mutual fund is a hard-core equity oriented product.

However, that’s not true at all. Mutual funds are a pool of professionally managed funds that invest across multiple asset classes depending on the nature of the scheme. A mutual fund may invest in equity or debt or any other money market instrument depending on the investment objective of the fund. A mutual fund invests across multiple money market instruments including stocks, government bonds, corporate securities, debentures, treasury bills, etc.

While equity funds invest predominantly in equity related instruments, debt funds are those mutual funds that invest in fixed income securities or debt related instruments. Debt funds offer investors a cushion during market volatility and also balance an investor’s overall mutual fund portfolio. Investors should never lay all their eggs in one basket. That’s the golden rule of mutual fund investments. It is always better that you diversify your investment portfolio with a mix of equity and debt securities depending on your risk appetite and existing market conditions. Depending on market movements you may have to also rebalance your portfolio every now and then.

Is it alright to invest in multiple debt funds?

As of now, according to SEBI guidelines, there are 16 different schemes categorized under debt funds. Each scheme has a different investment objective and caters to the specific needs of investors. Whether you should have one or multiple debt funds in your mutual fund portfolio will totally depend on the type of investor you are. If you are someone with a moderate to low risk appetite and wish to build your mutual fund portfolio only using debt schemes then you may have multiple schemes. Like we said earlier, each scheme caters to different needs and you depending on your investment objective and financial goals should invest accordingly. For example, you can allot 20 percent of your assets to an overnight fund so that you can immediately liquidate this amount in case of emergencies. The rest 80 percent can be invested in a medium or long duration fund to meet your long term investment objectives. Other examples could be allotting 35 percent to a liquid fund and investing the rest 65 in a gilt fund or a PSU fund.

Do keep in mind that the above stated are only examples and should not be taken in literal sense. Also, investors are expected to add not more than three funds to their portfolio. This way they will be able to keep a track on the movement of their funds. Investing in multiple funds might make things complicated as one has to keep a track on the fund’s performance at periodic intervals. Since most individuals do not have the time to remain dedicated entirely to their debt fund investments, they should try and restrict their investments to a minimum.

Also, if investors feel that they aren’t able to decide whether they should make multiple investments, they can always consult a financial advisor.

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