All things you need to know about debt mutual fund before investing

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Debt mutual fund invests money collected from investors in debt funds. This is unlike an equity mutual fund that invests their funds into the equity markets. Thus a debt mutual fund invests in instruments like corporate bonds, government securities, and treasury bills. They also do investment in money market instruments.

But for newbie investors, the equities draw the most attention keeping debt funds at the backstage. But debt funds do have some good qualities that make it a good investments asset class. A smart investor knows how to mitigate risks, diversify funds, while still preserving his capital and earning a steady and sustainable return on his investments. Majority of the aforementioned points require in-depth research and planning for both debt and equity, and both of these may not serve the purpose in isolation.

Let us take a look at some features of the debt mutual fund investment. These options may prove worthy asset class and you, may consider to include in your portfolio:

1. A good debt mutual fund helps in wealth creation

The debt securities have a name for giving stable and sustainable returns, with risk factor being relatively low in comparison to equities. Furthermore, wealth creation being a prolonged process it may even be a good idea to reinvest the earnings into the fund which will further enhance the growth process with the help of compounding. To aid the selection process investors can look at the publicly available credit rating for debt securities that are available.

2. The debt mutual fund helps in risk mitigation

Debt instruments are known for their stability. So the risk factor remains low and the investors in debt funds bear a moderately low-risk profile. Although debt funds may offer a relatively low return than equities, it backs up the capital with comparative safety. Thus, this makes the debt investment option an integral part of their portfolio. This is aimed at yielding long-term risk-adjusted returns.

3. A debt mutual fund is comparatively low volatility than other funds

The probability of capital loss is much lower with debt funds as their prices have lower volatility. So, for periods of short to medium term debt instruments generally deliver good performance. Thus, investing in debt instruments will ensure the preservation of your capital investment. Also, your portfolio will be prepared to sail right through during tumultuous times in the market sea.

4. Look before liquidity factor before investing in debt mutual fund

The returns from debt instruments move in a small range. So you can use the debt funds as a tool to mitigate short-term needs. Short term needs especially for liquidity. In a fresh point of view, you can consider the debt fund investments as short-term investments. As they offer moderate yields during a short span and fluctuate less in the rate of returns.

Such highly liquid funds can be the best investment option. This is especially good for short-term liquidity needs. As in such cases, the money can be retrieved quick and easily. Thus, for intermittent goals like a foreign holiday, you may plan your finances using this handy investment instrument.

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