Building your wealth through mutual fund investments can be challenging, with success relying heavily on proper risk management. Mutual funds allow you to invest your money in different stocks, bonds, and securities simultaneously, diversifying most of the risks associated with buying individual securities yourself – thus helping you grow your wealth.
Although your portfolio needs growth and wealth creation, it also needs an element of security against risk — something that debt funds tend to provide. These funds provide a measure of stability through fixed-income securities such as government securities, debentures, money-market instruments, and corporate bonds.
Keep reading to know what advantages debt fund investments offer – and how they can help reduce your overall mutual fund portfolio risk even during market volatility while providing decent capital appreciation.
- Lower volatility and stability since market fluctuations do not affect performance
Debt mutual funds tend to provide investors with income due to the fixed-income assets they invest in, including commercial papers, treasury bills, corporate and government bonds. These are relatively unaffected by market fluctuations, creating an effective way of mitigating risk in your mutual fund portfolio.
Equity mutual funds typically fluctuate in volatile markets, but if you invest in a debt mutual fund scheme despite such volatility, your financial outcome is unlikely to be severely affected. This means debt mutual funds tend to offer a certain degree of stability even when other funds may incur losses due to market fluctuations. As such, most professional investors and fund managers regularly advise to include debt funds as part of your overall mutual fund investment strategy.
- More liquidity
Debt mutual funds tend to be more liquid than most other types of investments since they are typically backed by government bonds or corporate bonds, which can be sold off and converted to cash easily if needed. This makes these mutual funds ideal for those who have short-term goals and may need quick access to their money while still wanting the potential for comparatively higher returns than other traditional investment avenues.
However, it is important to check whether any exit load is applicable before redemption; this is a fee that is deducted if the fund is redeemed before the maturity period ends.
- You can move debt funds to invest in other schemes
Debt funds offer an important level of flexibility that can help to reduce the risk of your mutual fund portfolio to an extent. For example, using systematic transfer plans (STPs), you can transfer funds to equity funds at regular intervals. An STP also offers flexibility with the amount being invested – you may prefer to invest a large sum at once or opt to invest regularly in smaller amounts. This way, you can diversify your investments and ensure that your capital is protected in multiple ways.
Closing thoughts
Ultimately, when it comes to investing in mutual funds, there are numerous strategies you can use to reduce your portfolio risk – including taking advantage of debt funds. And, if you are still trying to decide about investment strategies or need additional guidance, it can be helpful to consult a professional who can offer personalised advice so that you can efficiently protect your mutual fund portfolio and optimise your returns.
