Building a well-rounded investment portfolio is essential for achieving your long-term financial goals. While equities often take the spotlight, it’s important not to overlook the potential benefits of debt funds.
Debt funds, also known as income or bond funds, can be valuable to your investment strategy.
Here are five reasons why debt funds can play a crucial role in your long-term portfolio:
Reduce risk in your portfolio
While equity investments can deliver substantial returns, they are also subject to market volatility. Debt funds, on the other hand, are known for their relatively lower risk profile. Investing in debt funds gives you access to a diverse pool of fixed-income securities, such as government bonds and money market instruments.
These instruments provide regular interest income and are less susceptible to market fluctuations than equities.
Tax benefits
One of the significant advantages of debt funds is their tax efficiency. In India, long-term capital gains (LTCG) from debt funds are taxed lower than equities. If you hold debt funds for more than three years, the LTCG is taxed at 20% with the benefit of indexation.
Indexation adjusts the investment’s purchase price for inflation, effectively reducing the tax liability. Leveraging these tax advantages can enhance your post-tax returns and optimize your overall tax liability.
Liquidity
Debt funds offer high liquidity, making them suitable for short-term and long-term investment goals. Unlike traditional fixed deposits, where premature withdrawals may result in penalties, debt funds can be redeemed partially or entirely without any lock-in period.
This flexibility allows you to adapt to changing financial circumstances or capitalize on lucrative investment opportunities that may arise. Debt funds provide the option of Systematic Withdrawal Plans (SWP), enabling you to receive a predetermined amount at regular intervals.
Flexibility
Debt funds offer various investment options tailored to risk appetites and horizons. Whether you prefer low-risk liquid funds or are open to moderate risk through corporate bond funds or dynamic bond funds, debt funds provide ample flexibility to align with your financial goals.
Debt funds also allow you to choose between growth and dividend options, depending on whether you prefer capital appreciation or regular income.
Stability to your portfolio
Introducing debt funds into your investment portfolio adds a stabilizing element that can cushion the impact of market downturns. During market volatility, debt funds often remain resilient and provide a consistent income stream.
By including debt funds in your portfolio, you can better balance growth-oriented investments and stable income-generating assets, providing overall stability and reducing the impact of market fluctuations.
To wrap up
A well-diversified portfolio is crucial for long-term wealth creation in today’s dynamic investment landscape. While equity investments are essential for growth, debt funds offer many benefits that should not be overlooked.
So, embrace the power of debt funds and unlock the potential for a stronger, more balanced portfolio that stands the test of time.