Investing in debt mutual funds? 3 benefits and 2 disadvantages

Debt mutual funds have certain merits and disadvantages. We take a look at three benefits and two disadvantages of investing in debt mutual funds.

mutual funds Investing in debt mutual funds? 3 benefits and 2 disadvantages

Debt mutual funds provide unique stability to the investment portfolio.  |  Photo Credit: Representative Image

New Delhi: Mutual fund investment is one of the most preferred saving options for middle-income groups and retail investors. The inclination towards mutual funds is primarily because of the low risk as compared to the direct investment in stocks, bonds, and high returns as against the conventional saving options such as bank fixed deposits, recurring deposits, post office term deposits, provident funds, national savings certificate, national pension scheme and other government-aided schemes.

There are several types of mutual funds such as equity funds, debt funds, index funds, hybrid funds, fund of funds, etc. Investments directed into debt mutual funds is recommended during the phase of increased volatility in the stock markets as debt mutual funds have the highest exposure towards bonds, government securities and commercial deposits. This diminishes the risk factors due to low exposure towards equity and equity-related assets.

Debt mutual funds have certain merits and disadvantages. We take a look at three benefits and two disadvantages of investing in debt mutual funds.

Three benefits of investing in debt mutual funds

Low risk

With the proportionately high incorporation of debt-related investment options, debt mutual funds are less risky as compared to all other types of mutual funds. Debt mutual funds can be considered as an investment for an investor with a purpose of short-term wealth building, as well as, for a person with a perspective a building a sizeable corpus in long-term.

Low transaction costs

Buying and selling debt mutual fund units involves low transactional costs as against equity mutual funds. Investors can bulk up debt mutual fund units as a uniform transaction cost is levied by mutual fund houses be it for buying a single unit or multiple units in a single transaction.

Stability

Following the considerably low risk and minimised exposure towards equity and equity-related assets, debt mutual funds provide unique stability to the investment portfolio. The value of stability in the portfolio gets verified during the increased volatility in the stock markets when the net asset value of most of the equity-based funds decreases, while, debt mutual fund remains largely unaffected.

Two disadvantages of investing in debt mutual funds

Low returns 

Investors attracted with the lucrative returns of stocks and equity-related assets may get dissatisfied with the rate of return inferred of the debt mutual funds. As 60 to 70 per cent of the funds’ corpus is invested in debt schemes, following which, the overall return of the fund decreases substantially.

Lock-in period 

Most of the debt mutual fund schemes come with a mandatory lock-in period of more than 3 years and even 5 to 8 years in several cases. An investor willing to liquidate the debt mutual fund units before the completion of maturity period may end up paying the extra fees levied by the mutual fund house in order to encash the fund before the termination date.

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