Every individual has a defined set of short term, medium term and long term financial goals that they want to achieve in their life. Short term goals are those that need to be targeted over the period of a year or two. Renovation of home, planning a short vacation, clearing off credit card debts or personal loans can be some of the examples of short term goals. Coming to medium term goals, these can be life’s goals that need a minimum investment horizon of three years. Buying a luxury car, planning a foreign honeymoon, building a wedding corpus, etc. can be some of the examples of medium term goals. On the other hand, there are long term goals like retirement planning, building a corpus for your child’s future etc. which need a minimum investment horizon of seven to ten years.
Depending on how much corpus you need to build over a stipulated period of time and also depending on your risk appetite, an investor must diversify his or her investment portfolio. Mutual funds have been categorized by market regulator SEBI based on its various unique attributes like investment objective, risk profile, asset allocation strategy, etc. Equity and are two of the most famous mutual fund schemes that attract investors from all walks of life. Financial advisors generally request investors to diversify their portfolio with the right mix of equity and debt funds debt assets. While equity mutual funds predominantly invest in equity and equity related instruments for income generation, debt fund are those mutual fund schemes that aim at outperforming their underling in fixed income securities and debt instruments that generate regular income.
Features of debt funds
Apart from the fact the debt funds invest in securities that mature over a fixed period of time, there are other things as well which make them ideal for diversification. Do remember that it is never a good idea to only depend on one asset class for income generation. Suppose majority of your mutual fund portfolio consists of equity schemes, one should consider adding a debt fund to provide cushion during volatile market conditions. It is less likely for all the asset classes to perform in a similar manner in tandem. Thus, one should invest in debt schemes for diversification and balancing their portfolio’s overall risk.
Are debt funds ideal for targeting life’s medium term financial goals?
The answer to this question might depending on what type of investor you are, what is your current age, how much do you earn monthly, what are your existing liabilities and what income needs you have. There are different debt schemes which invest in securities that mature depending on the nature of the scheme and its investment objective. For example, a liquid fund invests in securities that mature over a period of 91 days. On the other hand, a medium term goals are generally targeted by equity schemes. However, a strategic bond fund invests in debt and money market instruments such that the Macaulay duration of the portfolio is between 3 years to 4 years. Investing in such a fund might help an investor target their life’s medium term financial goals.
No matter where you invest for capital appreciation, do understand the risks that these investments carry. Mutual fund investments are subject to market risks. Although debt funds are known to remain unaffected by the constant vagaries in equity markets, they do carry interest rate risk and credit risk. Also, mutual fund investments do not guarantee returns. Investors should only invest if the debt scheme holds the potential to help them with their income needs. The investment objective of the scheme should align with that of the investor.