Debt mutual funds- Are they ideal for conservative investors?

Debt mutual funds in India are often preferred by investors with lower tolerance for risks or a more conservative approach towards market linked investments. Are debt mutual fund schemes in India suitable for conservative investors? Do they add value to the portfolio? Debt mutual funds in India are those types of mutual funds where the assets invested in comprise of fixed-income securities, treasury bills, bonds and other money market instruments along with government securities. Investments in any debt based market instrument are similar to providing an advance to the issuing entity as well. These funds periodically generate interest income along with offering ample scope for appreciation of capital too.

These are generally fixed income generating securities which are highly preferred by those individuals who do not want to invest in equity markets which are otherwise of a volatile nature. These funds are managed professionally by fund managers and they make sure that they invest in securities which adhere to the investment goals of the fund in question. The credit rating of the issuer will help in knowing whether a firm will have the capability for serving regular interest obligations. Fund managers choose investments in instruments with higher credit quality ratings. They also work out the maturity period for instruments in every portfolio depending upon the interest rate outlook across the economy. If rates are expected to come down, managers invest in securities for the long term. If they are expected to go up, then investments are deployed throughout securities for the short term.

Are debt mutual funds in India great options for conservative investors? 

Debt funds in India may be considered good options for investors with a horizon of 1-3 years on an average. If that is the case, then you should look at short-term debt schemes in India like bonds. If you have a duration of 3-5 years, then dynamic bonds or corporate bonds could be a good option. The higher your duration, the higher your chances of earning returns as well. You should select debt funds on the basis of your investment objectives as well. Risks are considerably lower for these funds in comparison to equities although they come with some interest rate and credit linked risks in the bargain.

If fund managers invested in low credit quality based bonds, then they will naturally have higher credit risks. The portfolio value may come down owing to defaults or delays in interest or capital payments. Interest rate risks happen whenever bond prices tend to come down owing to increases in the interest rates, thereby making the investor more vulnerable towards suffering losses. There are no guaranteed returns and net asset value (NAV) of these funds will be linked to the overall rates of interest in the economy. The value of the fund may fall with a rise in interest rates.

Low-risk investors will find these funds absolutely ideal since they have expected returns and they are ideal for those investing for 3-12 months instead of keeping their funds locked in regular savings accounts. Liquid funds come with 7 -9% in returns with ample liquidity intact. 3-5 year investors may invest in dynamic bond funds as opposed to FDs in banks for earning better returns. Monthly income plans also ensure payouts on a regular basis, making debt mutual funds in India more suitable for low-risk investors.


What do you think?

Written by Amrina Alshaikh


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