Make place for debt funds in your portfolio

The equity market's stellar performance has beckoned many investors to take huge exposure to the asset class. Though equity is one of the best wealth creators in the long term, it is prudent to include a less risky asset class such as debt to balance the investment portfolio. While mutual funds have emerged as a preferred platform for investing in equity, debt investments are still largely restricted to traditional avenues such as banks Fixed Deposits (FDs) and savings accounts. Investors must shun their traditional bias and consider debt mutual funds as well to enhance returns.

Debt funds have something for everyone

Debt funds offer many options to investors as per their needs, horizon and risk profile. Broadly, these funds follow the accrual or duration strategy. Accrual-based funds focus on generating interest income from bonds' coupon and mostly hold bonds until their maturity. Liquid, ultra-short term, short-term debt and corporate bond funds follow an accrual strategy. As they are short-tenured, they are less sensitive to interest rate changes. Credit funds, however, are riskier as they are exposed to the credit risk. Duration based funds, in contrast, focus more on capital appreciation by taking interest rate calls and benefit from decline in interest rates. Investors can choose a fund based on three main parameters: liquidity, safety and returns. For instance, investors who want to keep an emergency amount aside can invest in liquid funds instead of a savings account as the former has the potential to generate high returns at reasonable liquidity. Similarly, those who want to enhance their returns on debt can explore income and gilt funds as they seek to generate higher yield based on the underlying interest rate cycle.

Thus, given the potential to generate better market-linked returns with reasonable safety and liquidity, debt funds have emerged as an essential element of an investor's asset allocation plan. And while they are exposed to interest, credit and liquidity risks, investors can choose from a range of debt funds to suit their risk-return profile and investment goals

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