Diversification is the soul of investing. We often hear experts say, “don’t put all your eggs in one basket”. The sole premise of diversification is to reduce your investment risk.

That means, if you invest in pure equity, you may consider diversifying across different asset classes. That being said, debt is the other major asset class that helps you diversify your investment portfolio.

Investors who want to stay away from the stock market volatility and have a low appetite for risk may consider investing in debt mutual funds. Debt as an asset class is less volatile and helps give stability to your portfolio.

An overview of debt funds

A debt fund is a mutual fund scheme that predominantly invests in fixed-income instruments, such as government securities, corporate bonds, corporate debt securities, treasury bills and money market instruments of varying maturities.

There are both long term and short-term debt funds available for catering to different investment horizons as well as liquidity preferences of investors.

Read more about: Aditya Birla Sun Life Short Term Fund

The debt mutual fund tends to generate a fixed income or returns. One of the main reasons why investors choose a debt fund is because of its relatively stable returns.

Benefits of investing in debt funds

• Portfolio Diversification

  
  

  Debt funds help you diversify your investment portfolio and spread out the risk of equities. Diversification in turn helps you stabilise your investment returns. They invest money into fixed-income securities that seek to generate income regardless of market conditions.

• Stable Returns

  
  

  Debt funds help in bringing stability to your investment portfolio. They are more likely to offer stable debt fund average returns without dependence on stock market sentiments. So next time the market does not perform well, you don’t have to worry about returns if you have invested in debt funds.

• High Liquidity

  
  

  One of the biggest advantages of debt funds is their relatively high liquidity. They don’t have a specific lock-in period and hence they can be easily liquidated and you can encash your investments very quickly. This benefit comes in handy during urgent financial needs.

• Less Volatility

  
  

  Debt funds are considered to be a relatively safer investment option. They offer a good hedge against the volatility of the equity market. Since they do not get impacted by market risk and uncertainties, they serve as an ideal investment option for conservative investors who seek safe and secured investments.

Limitations of investing in debt funds

While debt funds are a safer investment option, they are not entirely risk-free. They are characterised by interest rate risk, credit risk and liquidity risk. For instance, a change in the interest rate could impact your investment. Likewise, your investments might be put at risk if the corporate whose bond your fund may have invested in faces a liquidity crisis.

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Moreover, debt funds generate only reasonable returns. However, they are decent if you want to play safe and have a fixed financial objective in mind.

The bottom line

Despite having some limitations, debt funds still stand to be one of the best investment options for risk-averse investors who seek regular income.

Debt funds serve as a great portfolio diversification tool and mitigate your mutual fund portfolio risk.

Aditya Birla Sun Life AMC Limited brings you a wide variety of debt mutual funds to invest in. You may choose an ideal debt fund investment scheme depending on your investment horizon, risk appetite and investment objective.

To know more about Aditya Birla Sun Life Debt Mutual Fund Schemes, contact your financial advisor today.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.