Debt mutual funds as the name suggest are those mutual funds that invest the pooled funds of the investors into the debt market which comprises of bonds of companies, treasury bills, and other liquid debt instruments issued by the government as well as corporates. These funds are ideal for those investors who are looking to earn a steady return with low risk, in order to understand more about this concept one should look at some of the advantages and disadvantages of debt mutual funds –
Advantages of Debt Mutual Funds
Safe Investment
The biggest advantage of investing money into debt mutual funds is that they are a relatively safer investment as these funds invest money into debts and fixed interest-paying securities and thus are not exposed to volatility surrounding the equity markets which is the case with equity-based mutual funds where returns are highly volatile and sometimes even negative returns are possible in equity mutual funds. In simple words, just as in the case of cars you have airbags and seat belts so as to protect you from accidents in the same way in case of debt mutual funds there is the safety net of fixed returns which protects you from financial accidents.
Liquidity
In the case of fixed deposits, real estate, gold, or other investments you cannot liquidate your investments easily as there are many constraints while as far as debt mutual funds are concerned you can liquidate your investments instantly and can get the funds within 1 or 2 days into your bank account without any material loss.
Better Returns than Fixed Deposits
In the case of debt funds although they offer a fixed rate of return and give lower returns than equity-focused mutual funds still they offer better returns than your regular fixed deposits and hence other things remaining the same it proves to be a better alternative than fixed deposits as far as conservative investment is concerned.
Disadvantages of Debt Mutual Funds
Wealth Creation not Possible
The biggest disadvantage of debt mutual funds is that they give returns but they are very low as compared to equity mutual funds. In simple words, people who are looking for wealth creation should avoid debt mutual funds as these funds can help you in generating regular income but as far as wealth creation is concerned it can happen only in equity markets or equity mutual funds.
Not 100 Percent Risk Free
Another problem with these funds is that although they are called a safe investment however they are not 100 percent risk-free as there are many examples where companies have defaulted on bond and debt repayments resulting in lowering the return earned from debt mutual funds. In simple words just like seat belts and airbags do not guarantee 100 percent safety from accidents in the same way debt mutual funds are not 100 percent risk-free.
Transactions Costs
Mutual funds involve transactions costs such as entry and exit fees, fund manager fees, and so on, while in the case of debt mutual funds they are on the lower side still they are there which again can lead to some investors choosing fixed deposit as opposed to debt mutual funds as fixed deposits investment do not have any transaction costs associated with them.
As one can see from the above that debt mutual funds have pros as well as cons and that is the reason why any investor thinking of investing money into debt mutual should carefully read the above points and then only should take any decision.