You should invest in both debt and equity. Investors should have a diversified portfolio. In the current market situation, should you invest in equity or debt? It is not advisable to put all your eggs in one basket. The portfolio should have a part of debt as well.
Investors should have a mix of investment instruments in the portfolio so as to avoid risk, even if this may provide lower returns when compared to the booming stock markets. In addition to equity or equitylinked mutual funds, you should also allocate funds to fixed deposits and other small saving schemes. It is better to be risk-averse and sacrifice a part of the market gains.
Debt funds are a good option. They give good returns and offer tax benefits. By investing in debt mutual fund schemes as a part of debt allocation, you get many advantages. Debt funds offer a superior riskadjusted proposition along with tax benefits.
Fixed deposits are a popular option with conservative investors. They generally have a lock-in-period. A premature withdrawal by an investor involves a penalty. From an inflation adjusted perspective, fixed income mutual funds are a better option. Debt funds have a wide range of schemes offering something for all investors. Liquid funds, short-term income funds, GILT funds, income funds and hybrid funds are some.
Depending on their investments in different instruments and maturity period, debt funds are classified as gilt funds (short-term, medium-term and long-term), income funds, short-term funds and ultra short-term funds. Gilts funds basically invest in government securities with different maturity periods while income or short-term funds invest in both government and corporate bonds, and other instruments.
There are also ultra shortterm funds, which have an investment horizon of 3-6 months, invest in short-term papers such as certificate of deposits (CDs) and commercial papers (CPs). There is one more category called liquid funds or money market schemes. These funds are meant to provide easy liquidity and preservation of capital. These schemes invest in short-term instruments like treasury bills, collaterised borrowing and lending obligation (CBLO) market - an overnight borrowing and lending market for domestic financial institutions, CPs and CDs.
The NAVs (a unit price) of these funds are directly linked to yield and hence likely to do better when interest rates are upward bound. However, the former categories are different from liquid funds. Their NAVs are directly linked to bond prices as they aim for capital appreciation and trading gains by trading in the bond market.
Debt funds could generate better yields during economic growth, depending on the kind of scheme chosen by the investor. A fund invests in a range of securities leading to diversification of risk, an important parameter for an investor. Also, certain funds offer regular income schemes where interest is paid to the investor on his investments at regular intervals.
The biggest advantage with debt funds is the many features. These include fixed income, tax advantage, riskreturn balance, and liquidity. The main advantages of debt funds are relatively lower risk, steady income, liquidity of investments, professional fund management expertise at low costs, besides diversification of portfolio to have a balanced risk-return profile.
Debt funds also tend to perform better in periods of economic slowdown. They are an effective hedge against equity market volatility. They lend stability in terms of value and income to a portfolio. Some hybrid debt schemes take exposure to equity allowing investors to participate in the stock markets as well.
Performance against a benchmark is considered to be a secondary consideration to absolute returns when investing in a debt fund.
