Know the facts whether long-term investing in debt mutual funds is a good idea or not!
Long-term investment goals are mostly concerned with wealth accumulation. The investors who have low-risk appetite wish to invest for a long-term in mutual funds, but they desire to make a safe move. Debt mutual funds are considered to be the easiest and safest investment plans for them, but are they really good for the long-term growth? You must confirm this before proceeding your investments.
Typically, investors tend to believe that the debt funds are substantially low-risk fund and they can give assured returns in the long run irrespective of market volatility. Although the definition of debt funds provides the same, in the practical world the scenario is quite uncertain. The fact is that investing in the debt schemes involves some inherent risk, which must be known to the investors. The different types of risks involved in the debt investments are:
1. Interest rate risk- This is the type of risk to which the debt funds are majorly exposed to. It refers to the risk involved to the bond prices which is fluctuated with the changes in the interest rate from time to time. For instance, rising interest rates is good for the short-term bonds, while the falling interest rates are good for the long-term. The maturity of the fund plays a pivotal role here; longer the tenure higher shall be the rate of fluctuations in interest rates and thus higher rate of changes in the bond prices or debt funds.
2. Credit risk- This refers to the creditworthiness of the issuer of debt securities. In the case of government bonds, this risk is not involved, but for other corporate bonds, this risk plays a major role in fluctuating the worth of the investments made in bonds. If the credit rating of the issuer falls due to any of the factors, the bond is highly affected, and there value tends to diminish occurring losses to the investors. This way, the credit risk needs to be evaluated while investing in debt funds.
3. Liquidity risk- In certain cases, the fund managers of the debt mutual funds fail to sell the securities held by them which tend to reduce the liquidity of those plans. Accordingly, the main feature of debt funds for which many of the investors park their money in these funds is affected.
Moreover, the debt market in India is poorly developed, and there are only a few major institutions which are primarily providing the debt investment benefits. And thus, investing in the debt schemes requires proper analysis. When it comes to long-term investing, the investors need to make proper research and be sure of the returns so expected.
Long-term investing needs to be made in such funds which can offer growth opportunities. The equity market in India is enshrining with greater opportunities and making an investment in the equity mutual funds for a longer tenure can be a better choice for the investors.
Though debt funds provide financial stability and assured returns in the short run, investing in them for a long-term may be a bad idea.
Furthermore, the long-term earnings in the debt funds are taxable in the hand of investors, but the equity returns are tax-free.
The equity funds provide a variety of schemes to choose from as per the requirement. The investors having low-risk appetite can go for the large-cap funds which provide safety against market volatility and better returns in the long run for wealth creation. So instead of taking risks involved in the long-term debt funds, equity can be a safe option for the investors.
If you further need any assistance for making mutual fund investments in India, MF Planner and team are ready to serve you better. Get associated with us to experience a difference to make your future financially healthy.
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