When Should You Invest In Debt Funds?

Debt funds have often found little presence in investors' portfolios. What investors fail to realise is that debt funds are equally important as they help balance the portfolio. One of the reasons for the imbalance in the portfolio is a lack of knowledge about when and why should one invest in debt funds. DSIJ delves on the importance of debt funds to help investors decide better while investing in various funds.



Debt funds are something which are usually recommended for short-term period. As a thumb rule, it is said that if your investment time horizon is up to three years, then debt funds are the way to go. So, does it mean that debt funds are only meant for the short-term and, for the long term, these funds are not beneficial? This is not true. There are certain debt funds where you can take a position even if your investment horizon is long term.

First of all, debt funds are usually not popular among the investors due to the fact that equity funds provide better returns when compared to debt. Secondly, if at all if some investors wish to invest in debt, they are confused as to which debt funds to choose. But, more importantly, what should they look for before investing in debt funds? One of the most important factors that investors must consider before investing in debt funds is the average maturity or the Macaulay duration of the debt fund. Also, before investing, investors must decide on the time they wish to stay invested in debt funds. Time horizon plays a big role in the success of investing in debt funds.

So, what is the Macaulay duration and how to calculate it? It is the weighted average number of years an investor must maintain a position in the debt instrument until the present value of the debt instrument's cash flows equals the amount that is paid for that debt instrument. You do not need to calculate the Macaulay duration manually for each and every fund as it is very time consuming and cumbersome process. You can find the Macaulay duration for all the debt funds online and in their fact sheets.

So, now as you have understood what is is Macaulay duration, let us answer the question: When should you invest in debt funds? Investment in debt funds may vary, based on the investor's investment time horizon and his/her risk appetite. If the investment time horizon is less, then investors should go for the funds with lower Macaulay duration. However, if the investment time horizon is longer, then it is advisable to invest in debt funds with higher Macaulay duration.



Not just equity, but even while investing in debt funds, it is very important to have your risk assessed as your risk profile will help you to determine which debt funds suit your risk appetite. You also need to have financial plan in place which would help you to understand the time horizon you are looking for. Your risk profile and financial plan will help you to decide which category of debt funds would suit your requirements. Debt funds are often considered as safer investments. However, this is not the case, as debt funds such as dynamic bond funds and credit risk funds are only suitable for aggressive and moderately aggressive risk-takers.

Though equity helps you to generate good returns, debt funds help in providing capital protection. So, it is equally important to invest in debt funds along with equity. Sit with your financial adviser and understand the proper asset allocation which suits your financial behaviour and objectives for which you are investing.

Debt funds are often considered as safer investments. However, this is not the case, as debt funds such as dynamic bond funds and credit risk funds are only suitable for aggressive and moderately aggressive risk-takers.

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