How to include debt funds in your long-term investment portfolio?

Long-term debt funds can contribute to financial goals for those looking for risk-free investments.

Abeer Ray, MintGenie Team
Published23 Feb 2022, 03:09 PM IST

The popularity of equity funds and stocks dwindled as the market continued to slide down in red. Many investors adopted a risk-averse attitude towards investments and opted to park in debt funds that invest in fixed-income generating securities including commercial papers, corporate bonds, government securities, treasury bills, and money market instruments. If you are looking to earn a steady interest income along with capital appreciation sans any risk, investing your hard-earned money in debt funds might be the best possible option.

Typically, most people invest in short-term debt funds as opposed to most other financial instruments that yield returns over a long period. Investments in equity funds for prolonged periods are preferred though some may not be comfortable putting all their money in them. To avoid getting trapped into an all-equity allocation, some investors include a debt component even in their long-term portfolios. The allocation may be 60-80 per cent in shares, equity mutual funds, and exchange-traded funds with the remaining 20-40 per cent in debt. The division of investments into both equities and debt makes way for both capital appreciation and appropriate risk management, thus, ensuring a balance between growth and stability. 

We explain short term debt funds here.

Debt fund categories for long-term goals

Many people rely on tax-free fixed interest instruments like Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificates (NSC), sovereign gold bonds, and long-term fixed deposits. However, if you think that you have invested enough in them, and are looking for reliable options that are more liquid than the aforementioned investment tools, you may invest in quality debt funds that help to rebalance the portfolio when required, unlike other illiquid debt options instruments.

If you are currently looking at how to make use of certain debt fund categories to stay invested for a long period, you may start with putting away a part of your money in 

  • Short duration funds: These are essentially investments in bonds or papers maturing within one to three years.
  • Dynamic bond funds: Available in any duration ranging between a few months and several years, these funds allow you to invest for both the short and long-term depending on your anticipation of good returns.
  • Banking & PSU funds: These investments include paying for bonds/papers issued by banks, public sector units, and public financial institutions. These investments are comparatively riskier owing to the high volatility in the short run. However, you may consider these investments if you are willing to take risks.
  • Corporate bond funds: Parking money in these funds allow you to earn ample returns as they invest primarily in high-grade corporate bonds/papers.
  • Gilt funds: These are long-term, government-backed funds that put money in investments issued by the government. The maturity period in most of these funds is around 10 years. There is no chance of these funds defaulting on the returns promised, though changes in interest rates over a short period can result in investors swaying between low and high returns.

Combining debt funds for better returns

An adequate combination of debt funds can help investors achieve their long-term financial goals. The first step must be to finalize the categories before deciding which schemes to invest in. 

Check the maturity dates of various portfolios to continue earning during the entire investment cycle. While designing a portfolio, you can choose and combine schemes in various categories to earn returns both in the short and long run. This will help you gain access to a portfolio suitable for all times without you having to worry about constantly reshuffling the portfolio based on changes in interest rates. Good returns earned from one portfolio will compensate for the loss in the other. Also, investing in a debt fund portfolio for the long term will save you from the recurring hassles of capital gains taxation.

There is no perfect recipe for the right debt fund portfolio. “To each, his own” defines investors decide their perfect mix of the portfolio depending on their financial requirements. Investors looking to stay invested for the long term must avoid debt funds with high credit risk exposure. Limited credit risk exposure ensures consistent performance of the funds. 

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First Published:23 Feb 2022, 03:09 PM IST
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