Debt Fund: Including equity as well as debt funds in the portfolio can help reduce the stress of new investors.
Debt Mutual Fund: Most investors think equity is the best option for long-term investment. But they do not realize that unlike fixed income instruments, equity never grows in linear fashion. It undergoes many ups and downs over time. If the investor is skilled and has a lot of experience, then he takes these fluctuations as his stride, but new ones may be worried by this. In such a situation, including equity as well as debt funds in the portfolio can help reduce the stress of new investors. However keep in mind that this investment should be for long term. Know that in the long term, an investor should include debt funds in his portfolio.
1. Stability comes to the portfolio from debt funds
Usually, many investors look at the past performance of that fund without assessing the risk while investing. They are attracted towards a fund by seeing good returns. But once they get the impression that volatility in equity is high and they can also get negative returns, then they get scared and get out of loss. Therefore, for such investors, it is important to always know their risk profile. After that they should choose their fund. Including debt in one’s portfolio will not only provide stability, but will also prevent you from taking hasty decisions like selling equity or equity funds at a loss.
2. The debt fund also acts as an emergency fund.
In March 2020, due to Corona virus epidemic, the market crashed and the equity segment fell by almost 40 per cent. During the same period, many people lost their jobs. During such a situation, if someone had 100 per cent allocation in equity, they had to bear a huge loss. In such a situation, the availability of debt in one’s portfolio, which can be encashed at an estimated price, can save an investor from the loss of equity. That is, it also works as an emergency fund.
3. Outperforms over equity at times
Debt has also performed much better than equity at times. In the chart below, we have considered equity mutual funds and debt mutual funds, showing the performance of different categories for the last 10 years. These are annual returns and the aim is to show volatility. It can be seen that due to volatility many times equity funds have given lower returns than debt funds. Therefore, investors who do not want such volatility should include debt funds in their portfolios along with equity funds.
Are fixed deposits a better option
Fixed deposits have been Nivea’s preferred option for most Indians. Many investors may think that since they have fixed deposits in their portfolio, they do not need to invest in debt funds either. But there are some points on which every investor should pay attention. Because debt funds can be a better option than regular fixed deposit investments.
1. Reinvestment Risk
Nearly 20 years ago, fixed deposits were yielding about 10 per cent annual returns, but today fixed deposit rates have come down to just around 5 per cent. Most fixed deposit investors invest for 3 to 5 years and renew their investment if they match. Therefore, when investors renew a fixed deposit, they reinvest it at a lower interest rate. Also, the current interest rates applicable to fixed deposits are lower than the current inflation rate, which means that the real rate on these will be negative.
2. Liquidity problem
If there is a need to withdraw money from a fixed deposit in an emergency, then banks charge a penalty for it. But there is no penalty for exiting debt mutual funds.
3. Tax Benefit
With fixed deposits, investors have to pay tax on interest income as per their income tax slab. An investor who falls in the 30% tax slab will have to pay 30% tax on the interest income earned from the fixed deposit. But in the case of debt funds, if the investors redeem within 3 years, they will have to pay according to the income tax slab. Those who redeem more than 3 years, they will have to pay 20 percent with the benefit of indexation.
