The idea of investing in Debt Funds can either be a part of a portfolio management or it can also be a calculative approach. Investments in debt funds are advised during situations where the market is highly volatile. If you as an investor wish to invest your funds in equity based funds, you can park your funds in a debt fund, temporarily, and then in a systematic procedure choose to switch to a suitable equity based fund. There is a wide variety of choice investors can choose from when it comes to debt funds. All you need to do is, carefully evaluate your investment decisions in the light of:
Your investment objective
Risk appetite
Span of your investment.
Investors can basically look forward to moving towards debt investment as part of their portfolio re balancing or just to take advantage of the current interest rate scenario. Depending upon your choice, you can look forward to stacking your investments into debt funds in order to earn higher returns and continue to invest in equities through the Systematic Investment Plan (SIP). It is very important to factor these since, they can help you generate good returns in future disenabling you to opt for credit like a car loan, personal loan etc. in future. Given the current interest rate scenario, investors can look forward for investing in:
Liquid or Ultra short term schemes:
These schemes basically, have a maturity period of upto 91 days. Ultra short term schemes are much more liquid since they are money market schemes and take marginal exposure to securities that are beyond a 3 month investment period in order to yield higher returns. They also carry the advantage of higher returns during phases of high inflation or tight liquidity and investors also enjoy lower interest rate risk.
Short term funds are best for those individuals who wish to fulfill their short term financial goals like buying a laptop or investing for vacation abroad. Investors who seek to park their funds for gaining Dividend Distribution tax benefits (DDT) are also inclined to invest in Short term schemes since the DDT is 25% and 12.5% in Liquid and Ultra Short term funds respectively. Also this scheme looks towards investing in those assets that have a high credit rating.
Fixed Maturity Plans (FMPs):
Investors who look to invest in assets for a period of 1 year, look forward towards investing in Fixed maturity plans. These assets invest their funds in securities that have the same tenure so that, you can avail the returns at the time of maturity.
Investors need to evaluate their possible rate of return along with the prevailing market yields and the liquidity and credit risk factor. Investments in higher-rated securities, helps you to manage credit risk efficiently, whereas for liquidity, you need to look at the exchanges where the schemes are listed.
Short Term Income Funds:
Investors who are willing to take moderate amount of risk and wish to seek liquidity of their assets, Short term income funds provide the right option. Generally, these assets carry a tenor of an average of 2 to 3 years where your returns will be generated based on your accrual income and capital gains on the amount you have invested. However, if you wish to enjoy higher liquidity then investing in these funds for a minimum period of 6 months is advised. These schemes are exposed to lesser interest-rate risk and are best suited for investors in this current interest rate cycle. With a combination of accrual income and capital gains, your portfolio is likely to generate good returns in the future.
A combination of the above mentioned debt funds can also be utilized considering the expected returns and the investment tenor.