Why Should You Consider Investing in Debt Funds?

The financial need of every individual is different. Hence, while financial planning one needs to set realistic short term and long term financial goals. Do not try to mimic the financial goals of your friends or peers. Your existing financial liabilities may differ with those of your peers, so make sure that you try and keep your goals realistic and unique. Just like focusing on long term goals is important, it is essential that we invest smartly to achieve our short term goals as well. Long term goals like retirement planning or building a corpus to secure your child’s future need long term investment. You choose a plan, decide the amount you wish to achieve and be consistent with your investments throughout the tenure.

However, short term goals may need more focus because usually the investment horizon is less than five years. To accumulate a desired amount in such a small amount of time may need an investor to keep a close tab on their investments. If the investment scheme is underperforming, they may have to consider switching to another plan. A lot of factors like inflation, daily market vagaries may affect the performance of a short term investment plan. This is why an investor should understand their risk appetite and have a clear financial goal while investing.

When it comes to short term investments, a lot of people talk about debt mutual funds. Anyone who is considering investing in mutual funds for short term goals, debt mutual funds seem like a feasible investment tool (although this may not be true in every situation). So let us understand more about debt funds and why one may consider investing in them.

What are debt funds?

Debt funds are those mutual funds that invest in fixed income securities. Debt mutual funds invest in fixed-income market securities like treasury bills, call money, corporate bonds, etc. This is why investors who do not have large appetite for risk generally consider investing in debt funds (however this may not be true every time).

Several Indian investors are considering investing in debt mutual funds to meet short term goals, and you, too, depending on your financial goal, should decide on which instrument you should invest your hard earned money in.

How do debt funds work?

As mentioned earlier, debt funds invest in fixed income securities like government bonds, treasury bills and other debt oriented instruments. Later, debt funds sell these securities at a certain margin. The difference between the cost price and the selling price leaves debt funds with a substantial amount that results in either the appreciation or devaluation in the Net Asset Value (NAV) of the fund. Debt funds are also eligible for periodical interest from the fixed income securities they invest in. The NAV of a debt fund depends on the interest rate offered by fund’s underlying assets.

Why should one consider investing in debt funds?

Here are some of the reasons why one may consider investing in debt mutual funds:

Debt funds may help you achieve short term financial goals

Since debt funds invest in fixed income securities, they make a decent investment option for investors with a short term investment horizon and short term goals. So if you have goals like renovating your house, or if you are planning a vacation in a couple of years, or planning to make the down payment of the new car you are planning to purchase, debt funds might be able to help you achieve such short term financial goals.

You may invest in debt funds via SIP or lumpsum

Mutual fund houses usually offer modes to make investment in debt funds – you may either make a lumpsum sum investment or you may start a debt fund SIP. A Systematic Investment Plan allows investors to invest a fixed amount at regular intervals (usually per month). By choosing SIP plan, an investor can continue investing in debt funds from the comfort of their smartphone or laptop. Anyone who wishes to give their investment a systematic approach and wish to benefit from compounding and rupee cost averaging may choose to invest in debt funds via SIP.

Here are some of the reasons why you may want to consider investing in debt funds. These fund usually carry a low risk ratio (although this may not true in every situation), are professionally managed and ideal for short term investment.

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