21st July 2024

Are Debt Funds Suitable For My Financial Goals?

Before investing in any type of financial scheme, it is always better to have an efficient financial plan. The investment market is flooded with numerous financial schemes and sometimes deciding on which investment scheme to put your hard earned money can get confusing. Financial planning purses investors to determine their short term and long term financial goals. When you have a defined set of goals, making an investment decision becomes simpler. Once you have a defined set of goals, the next thing for investors to do is determine their risk appetite. A risk appetite is nothing but an investor’s capability to take risk of a certain degree with his or her finances and invest in a financial scheme so that they are able to generate capital gains at some point of time in future.

For those who carry some risk appetite and are keen on generating capital appreciation from market linked schemes, they can consider investing in mutual funds. Market regulator SEBI describes mutual funds as, “A mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in the offer document. Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same proportion at the same time. Mutual fund issues units to the investors in accordance with the quantum of money invested by them. Investors of mutual funds are known as unitholders. The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.”

What are debt funds?

SEBI has further categorized mutual funds so that investors are able to take an informed investment decision. Mutual funds are categorised based on their certain unique attributes like fund size, investment strategy, asset allocation, risk profile, etc. Some of the major mutual fund categories include equity, debt, solution oriented, hybrid, gold, ETF, etc.

Debt funds are those mutual fund schemes that invest in fixed income securities. While equity funds invest in stocks and equity related instruments, debt funds in debt securities that generate regular income. This is the primary reason why debt funds are considered to be less volatile as compared to equity mutual funds.

Can debt funds help accomplish life’s financial goals?

Debt funds invest in securities that mature over short term. Some debt schemes like liquid funds are considered for building an emergency fund. If you have surplus cash parked which is going to stay with you for a short term then you can invest that capital in an overnight fund. Different debt fund schemes are meant for meeting life’s different financial goals. So depending on your goals you should invest in debt funds. For long term goals one should usually consider investing in equity funds since equity investments are known for providing capital appreciation over the long term. For short term goals like buying a luxury car, renovation of home, or building a corpus for a short vacation. So yes, debt funds can help you accomplish your life’s financial goals but it depends on what those goals are. Also, it is also a good idea to consult a financial advisor who might help you in taking an informed investment decision. Mutual funds do not guarantee returns so make sure you keep a diversified investment portfolio.