Should we invest in Debt funds which give less returns?

A debt fund typically invests in short-term or long-term bonds and the fee to manage a debt fund is lower than equity fund because the management cost is very less. These bonds are fixed income investments and typically invest in government or corporate bonds and for the same reason these return on these instruments are safe and consistent. In fact the main motive of this fund is preservation of capital and generation of income to beat inflation.

All companies require money to meet their operational expenses and expansion plans. While some fund is raised internally or through equity listing on the stock exchanges, some is borrowed. A debt security is this borrowed money that is taken by one borrowing company from lending company and borrower pays interest periodically and the principal is paid at the end of the term.

meraFinance suggests young people without any dependents or commitments to keep invested 20-30% of your investment corpus in capital preserving instruments, 10-20% in cash form for meeting any emergencies, some part in Gold, and rest in diversified equity through systematic investing. Those who are nearing to their retirement should not invest more than 30% of their investment corpus in equity. Another important investment often ignored by investors is investment on their health (Health Insurance) and securing their dependents (Life Insurance). We recommend you to consult a good financial advisor before investing.

With interest rates on the rise, fixed deposits popularly called as FDs and Debt funds have undoubtedly emerged as an attractive investment instrument. However, investors should be careful while locking their money even for a 1 year period. Any subsequent increase in interest rate would mean an opportunity loss for this class of investors who agree their returns for lower interest rates. Remember, Low interest is due to Low risk and High interest is due to High risk.

Also Debt fund managed by mutual funds enjoy tax breaks (Ex: long term capital gains) compared to FDs managed by banks.

Investors who wanted to park funds temporarily should choose Debt funds to FDs due to lock-in constraint. There is no one Debt instrument which is good for all. Based on the lock-in, returns vary so it’s important to plan for how long we don’t need that money. One should consult a registered financial advisor or has to put in lot of effort to analyze which instrument fits his need. One should also look into effective returns i.e. post-tax. There are few instruments like PPF, NSC which are not taxed but yields high returns compared to other instruments of the same class.

We have seen people losing lot of their money and falling into debt due to the stock market crash. This happens due to improper planning and greed. Balance should be there not only in work-life but also in equity-debt.

If the onus is on capital preservation for long term and not liquidity then FD is clearly a choice. The only thing you need to worry about is lock-in. One has to keep checking which debt instrument is giving maximum returns.