Debt plays a very important role in today’s financial world. Everybody, from individuals to governments, relies on debt in one way or the other. This explains why India’s household debt reached a record high of 39.1% of the GDP while the country’s external debt is now placed at $663.8 billion.
These developments have increased the popularity of financial instruments like debt funds, which are now an appealing investment opportunity for most. I find these low-risk investments far better than equity investments in today’s volatile world.
But are debt funds what you need to enhance and strengthen your portfolio? In this blog, I will try to explain the details of debt funds to you and determine how you can use them to your advantage.
Understanding Debt Funds
Also referred to as fixed-income funds, debt funds are slightly different from conventional equity mutual funds. See, equity funds entitle you, the investor, to part of the company’s ownership.
However, things are different with debt funds, which are more about creating a lender-borrower relationship between the parties involved. The borrower here will issue bonds to raise the money, while the investor will invest in these bonds to earn a fixed or assured income.
What is Making Debt Funds Such a Popular Investment Choice?
I mean, who does not like having a fixed and assured income with so many vulnerabilities around? Debt funds are here to provide investors with a reliable, steady flow of income, which makes them a preferable investment.
But this is not the only reason why debt funds are popular. In fact, there are multiple other such reasons that include:
- Lower Risk: This should not come as much of a surprise since fixed-income assets are generally considered safer than conventional equity investments. These funds are less vulnerable to macro events like geopolitical events or economic downturns. This gives investors an opportunity to diversify from the risk of the stock market.
- Regular Income Source: One of the primary factors fueling the popularity of debt funds is that these funds offer a regular income source. This makes it a perfect choice for every investor looking for regular dividends and using a fixed income to meet their goals.
- Better Flexibility and Liquidity: Not many people realize this, but debt funds are genuinely great for emergencies when you need quick access to your money. These funds offer highly impressive liquidity, giving you the freedom to sell and buy units. As a result, investors get the flexibility to manage their investments with changing financial needs.
- Potential of Better Capital Gains: There should be no confusion about whether debt funds are designed to generate income for investors. However, in certain cases, changes in interest rates might impact the bond’s prices positively. This gives the investor the opportunity to earn impressive capital gains.
Risk Factors To Consider While Investing in Debt Funds
While there are many advantages of debt funds, there are also certain vulnerabilities you need to understand before investing in them. Some of these factors include:
- Vulnerable to Changes in Interest Rates: There is always the chance of interest rates increasing and lowering the prices of debt funds. This makes these funds vulnerable to any interest rate changes.
- Inflation: An increase in inflation can result in the investor losing their purchasing power. You need to keep an eye out for this vulnerability, especially when inflation grows faster than the fixed income amount.
Bottom Line
There is no argument that debt is one of the most important requirements for businesses and institutions in today’s day and age. This is where things like debt funds give you an opportunity to capitalize on debt.
Many people are using funds from the best debt consolidation loan to invest in debt funds and grow their wealth. But if you decide to do so, make sure you are thorough with the aforementioned information to make informed choices.
