Debt funds have gained significant popularity over the years thanks to their stable returns and lower risk profile than equity funds. Having said that, there are several myths surrounding debt funds, which can deter you from making bad choices and leverage their potential to the fullest. So, what are these debt fund myths? Let’s find out.
Myth 1: Debt Funds Are Completely Risk-free
Often debt funds are viewed as low-risk investments because they invest in fixed-income securities. However, it’s essential to note that debt funds are not entirely risk-free. They are exposed to three types of risk, namely:
- Credit Risk
Credit risk arises from the possibility of debt fund issuer faulting on payments or failing to repay the principal amount at maturity, which can result in a loss for investors.
- Liquidity Risk
Liquidity risk arises when a debt fund fails to sell its holdings to meet redemption obligations from investors. This generally happens when there’s a sudden increase in redemption requests or the market for its underlying security becomes illiquid. Such a scenario can result in the fund manager selling the holdings at a discount, resulting in a loss for investors.
- Interest Rate Risk
Debt funds are also exposed to interest rate risk. Note that bond prices and interest rates move in opposite directions. When interest rates peak, bond prices go down and vice versa. Medium to long duration funds are more susceptible to interest rate risks than short-duration funds.
Hence, debt funds are not entirely risk-free investments. In fact, no investment is completely risk-free.
Myth 2: All Debt Funds Offer the Same Returns
There are 16 categories of debt funds. However, not all funds offer similar returns. Returns on debt funds depend on the fund’s underlying securities and the fund manager’s strategy. Some funds may invest in government securities, while others may invest in corporate bonds. Some funds may invest in short-term securities with a maturity of one year, while others may invest in long-term securities maturing in five years or more.
Before you invest business money, evaluate the fund’s long-term performance, its investment objective, and the risk profile. Also crucial is to analyse the fund’s expense ratio and credit quality of the underlying securities.
Myth 3: Debt Funds Are Only For Conservative Investors
It’s often believed that debt funds are only for conservative investors. However, that’s not the case. These funds are suitable for all types of investors, even those with a high-risk tolerance. Debt mutual funds provide stability to one’s portfolio and prevent the gains from eroding due to market volatility.
While some debt funds invest in highly-rated bonds, some funds like credit risk funds invest in slightly lower-rated bonds to generate higher returns. The key to investing in debt funds is to choose the right type of fund based on your investment objective, risk tolerance, and investment horizon.
Myth 4: Debt Mutual Funds Require Huge Upfront Investment
One common myth with debt funds is that they require a huge upfront investment. However, this is far from the truth. In fact, many debt funds have a low minimum investment requirement, making them accessible to a wide range of investors.
In fact, you can start investing in debt funds from as little as ₹500 to 1,000. If you have a large investible surplus, the amount can go as high as a few lakhs of rupees.
In Conclusion
Steering clear of these myths will help you maximise value from your debt fund investments. It will help you choose the right fund and ensure you are well on your path to achieving your goal.
With Shootih, India’s first Business Wealth Management platform you can invest in a range of debt mutual funds as per your choice and investment horizon. To book a product demo with our expert, click here.
Disclaimer: Mutual fund investments are subject to market risks, please read all scheme-related documents carefully.
The content of this blog is not intended to serve any professional advice or guidance and Shootih takes no responsibility or liability in whatsoever manner for any investment decisions made by the readers of this blog or other blogs. Readers should seek independent professional advice before making any investment decision based on the information provided on this website.
