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Some Myths about Debt Mutual Funds

Experts say slight debt exposure better than an all-equity portfolio Having debt funds in a portfolio allows one to capitalise on equity market downturn

 
ONE of the biggest myths prevalent among people is that debt funds are not for retail investors. There are many myths associated with debt mutual funds, a category that is not as popular with retail investors as equity funds.

 

Myth No. 1: There is no risk in debt mutual funds: All investments carry certain degrees of risk. But on a comparative basis, one investment may be less risky than the other. This applies to debt mutual funds too

Even in debt mutual fund as a segment, income funds have some element of risk involved. However, income funds are less volatile than equities. Debt funds are linked to market movements in the money markets.


Myth No. 2: Those investing for the long-term (10-15 years) don't need debt funds in their portfolio: All investors need exposure to debt in their portfolio. It has been proven that a portfolio with some debt exposure actually outperforms an all-equity portfolio over the long run. Also, having debt funds in a portfolio allows capitalising on investment opportunities in the equity markets during a downturn. For example, debt funds offer good accrual returns over a period of 18-24 months. Monthly income plans are suitable for investors with two to three years horizon, while dynamic bond funds is good for investors who can spare 12-18 months. Fixed maturity plans are most suitable for conservative long-term risk averse investors, experts say.


Myth No. 3: Debt funds are only for institutions and HNIs: Most retail investors feel that debt funds are investments that demand large sums. While almost 75 per cent of mutual funds industry assets are in debt, this statistic shows how retail investors have stayed away from debt. They feel that r k these are short-term investments and not meant for retail investors. This myth is due to lack of education. Debt funds are essential for balancing any investment portfolio. MFs are primarily perceived as `stock s market' investments by retail investors. This myth y should be addressed by distributors.

Myth No. 4: Debt funds are `loans' given by the investor to the fund house: A loan and investment differ greatly. Debt funds are investments and not loans. The matter should be looked at in two ways.

Firstly, the investment is in units with dividend as well as growth options.

Secondly, debt funds don't pay any fixed interest.

The final returns depend on the coupons of the underlying securities as well as the market movement of these debt securities. The units in a debt fund give the investor an ownership in the fund, but a loan does not give any ownership to anything at all.

 

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