You may have heard tons of different reasons why mutual funds are the investment option you should go for. More than that, you must have received all kinds of advice abut how to invest, how much to invest, etc. One of the biggest advices out of those will be to invest in equity mutual funds. Given that they are one of the most popular types of mutual funds, this advice stands to be a smart one.
This is because thousands of other investors put in crores monthly. This creates immense growth in various equity mutual funds and being invested in such a fund means you get guaranteed gains. On the other hand, a lot of investors stay as far as possible from debt-based mutual funds.
A reason for this can also be that due to the larger popularity of equity mutual funds, there is a larger interest and knowledge of the investment option among aspiring investors. On the other hand, debt funds are often ignored due to the high volatility in the debt market. However, what others see a risk can be an opportunity for you. To do that, you need to understand what debt funds are and how you can invest in them best.
How debt funds work?
The first thing that you should know about mutual funds is that they pool your money and invest it in different options. The primary difference between equity funds and debt funds is the place they invest your money in. Equity funds invest your money into stocks, shares, etc. On the other hand, debt funds invest your money into bonds, securities, etc.
Now, every security has a credit rating. This rating shows the risk that the issuer of the debt instrument will default on disbursing the returns on the money you invested in. This is one of the biggest risks when you invest in debt funds. The fear that you invest a lumpsum amount in a debt fund and your returns get stuck. However, if you have a good fund manager, he/she will invest in securities that are rated higher.
In addition to the credit risk, debt funds also have no guarantee of returns. Every debt fund has a Net Asset Value (NAV). This value fluctuates based on the overall interest rates in the national economy. All of this shows that the debt market is extremely volatile. However, it still has a potential for great returns.
Using SIPs
If you removed the risk part of investing in debt funds, they are a great opportunity to put your savings into. Hence, you need to look at what the risks are first and then find a way around them. When you invest a lumpsum amount, the biggest risk in debt market volatility. This can cause a loss or your money to get stuck in a fund. Hence, one way you can reduce risk is to not invest in a lumpsum.
Systematic Investment Plans (SIPs) are a great option for investing for mutual funds. They are mostly used to invest in equity funds. However, they can serve equally well with debt funds. SIPs are used as tool to invest a smaller amount in a fund at regular intervals. This way you don’t have a lot of money invested in a debt fund at once.
Moreover, SIPs allow you to turn the market volatility into an advantage through rupee cost averaging. Debt funds are linked to the market and their prices go higher and lower based on how price sensitive the debt instruments in the fund are. However, with SIPs you buy units at different prices and this later on creates an average cost of purchase. No wonder SIP investments are referred to as the ‘good EMI’. Happy investing!
