Debt Index Funds: It is generally believed that a better-diversified portfolio is necessary to achieve risk adjusted returns and achieve your financial goals. This can be accomplished by investing in different types of instruments available in the expansion of the risk return spectrum. In general, equity investment is considered the best option to increase wealth over the long term. Whereas debt investments provide protection from stable returns and downside risks. Equity carries a higher level of risk than debt instruments. However, it is important to keep in mind that investing in debt is also not risk free. There may be different levels of risk in different schemes of this category.
Risk in debt investment
There are several sources of risk in debt investment, the main ones being credit risk, interest rate risk and liquidity risk.
Credit risk: It indicates issuer risk or default risk. If the issuer defaults in the payment obligation, you may not receive the full value of the principal invested.
interest rate risk: Bond prices have an inverse relationship with interest rates. This means that the value of debt investment in your portfolio will decrease with an increase in interest rates and will increase when the interest rate decreases. This can bring a little bit of volatility in your portfolio.
liquidity risk: It refers to the convenience of buying and selling bonds in your portfolio.
An ideal solution
As an investor, you have the option to invest in different types of instruments, from debt mutual funds to bonds. But, Target Maturity Debt Fund is an ideal solution for you to avoid any kind of risk. It is a debt investment option that has bond characteristics. That is, by keeping the investment till maturity, you get a fixed return. Apart from this, it has some additional features, which can help you meet the challenges related to liquidity and accessibility. This fund has many advantages.
Return forecast: Due to quality issuers such as PSUs and defined maturity, returns from index funds are mostly in line with prior estimates. Due to large-scale investment by these funds in government and public sector bonds, the risk is greatly reduced. Defined or targeted maturity means that bonds in the portfolio will be matured over a fixed period of time.
Easy and low cost: Unlike ETFs, you do not need to transact through a demat account to buy or sell units in index funds. You can buy units through any fund house, like any other mutual fund scheme.
Liquidity: You can easily buy and sell units in index funds through mutual fund houses, so you will not have to worry about the potential liquidity of the exchange.
Transparency: Debt index funds mimic an indelible debt index, so they provide better liquidity and transparency in terms of investment, issuer ratings and maturities.
Tax Benefits: Taxes are applicable on marginal rates on coupon income from bond investments, compared to which index funds are more tax efficient. On the other hand, index funds are taxed for the benefit of indexation, which can potentially reduce tax liability on your investment returns.