Why Debt Funds Are A Good Investment For Beginners

By | October 13, 2017

Investing early is always rewarding. We are often advised to start saving and investing as soon as we begin our careers. Read on to find out why investing in Debt Funds could be a great start for rookie investors.

Why Debt Funds Are A Good Investment For Beginners

Beginning your investment journey early is always rewarding. We are often advised to start saving and investing as soon as we begin our careers.

For newly employed individuals, investing can seem like a daunting prospect. However, that couldn’t be further from the truth. Investing is fairly simple. But, in order to be successful, one has to adopt a disciplined approach towards their investments.

At the beginning of an individual’s career, salaries tend to be on the lower end of the pay scale. This can make saving money and attaining financial independence a fairly uphill task.

In this scenario, choosing the right investments can certainly pose a challenge.

How to begin?

Newbie investors should start planning their goals and attempt to align their finances with these goals. You can only aim for success in investing when you clearly outline your goals. Ask yourself this: Why are you investing?

Understand investment horizons and financial goals

An investment horizon is the time period during which you can invest money in a financial product. This is how much time you can give yourself to prepare financially before you have to achieve your investment goal or milestone that you set for yourself.

  • Short-term goals

If you have short-term goals that can be achieved within the next 1-3 years, you should consider investing in financial investment instruments that offer minimal constraints with regards to flexible liquidity and investment lock-in periods. Some options you could consider are Liquid Funds or Short-Term Debt Funds.

  • Long-term goals

Long-term goals are those milestones that will ideally take between 5-10 years to realise. While planning for your long-term goals, you should be prepared to invest in instruments that offer a longer lock-in period.

If your goals are 5-7 years away, you could invest in Equity Linked Savings Schemes (ELSS). These investments have a lock-in period of 3 years and offer you tax benefits under Section 80C of the Income Tax Act.

Additional Reading: ELSS 101: To Invest Or Not To Invest

For your long-term milestones, you could also consider investing in Equity Mutual Funds, which offer high returns but come with a certain degree of volatility. If you are willing to be adventurous with your money and are unafraid of taking some amount of financial risk, these will be ideal for you. But remember, you must consider your life stage before choosing your investment avenues.

Now that you have an understanding of investment horizons as well as the two main types of financial goals, here are a couple of useful tips.

Generally, it isn’t a good idea to expose the money you have saved for short-term goals to the high risks of equity funds. Don’t be lured by the promise of exponential returns on your investment if you are aiming to build a corpus for any short-term goals.

Keeping short-term goals and rookie investors in mind, if we take away equity investments from the list of options, we are left with Short-Term Debt Funds, Liquid Funds, Recurring Deposits and Fixed Deposits.

While Recurring Deposits and Fixed Deposits offer similar mediocre rates of returns, we can tell you why Debt Funds will be a useful investment choice for young, salaried individuals.

Good for new investors

Being new to the corporate set-up, newly employed individuals may find themselves on shaky ground when it comes to investing. Debt Funds are low-risk investments and therefore allow new investors to learn about managing a regular income, budgeting expenses and build a savings pattern that they are comfortable with.

Easily liquidated

Although the rule of thumb with Debt Funds is that the longer you are invested, the higher your returns will be, there is still a certain liquidity that Debt Funds offer. This allows new investors to gain peace of mind regarding their investments and gives them an assurance that their money is not exposed to high levels of volatility Withdrawals in Debt Funds are flexible and you can access the money at relatively short notice.

Growth of investment

Yes. A Savings Account is a good avenue to park your money. But, be prepared for fairly low returns compared to other forms of investment. As a more lucrative alternative, investing in Debt Funds offers investors low-risk returns, which are pegged at approximately 8%. Talk about double benefits.

If you remain invested in Debt Funds for more than 3 years, your investment becomes tax-efficient due to indexation. As the years go by, your income will gradually increase along with your tax liability. This is when making investments that are tax-friendly becomes important.

This is a primary reason why Debt Funds pose as a better alternative to Fixed Deposits.

Emergency fund

A Debt Fund will help new investors build an emergency fund that will serve as a financial cushion in case you are faced with any unforeseen financial emergencies. Your emergency fund should ideally be equal to at least 3-6 months of your expenses.

Additional Reading: What To Remember When Choosing The Right Debt Funds

Making the right investments is the first step towards building a strong financial portfolio. Begin with a relatively safe investment option. Go down the Debt Fund route.

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