Debt funds are typically used to support short-term aims, but what about long-term objectives?
For those who want to invest for the long term, you may wonder why they should not adhere to simply equities funds.
Not every investor is capable of building an all-equity investment portfolio. Even in long-term portfolios, most investors are better off with a little amount of debt. About 60-80% of the company's stock and the remaining 20-40% of its debt are owned by the company.
Why? Because most portfolios benefit from an asset allocation-based approach that balances growth and stability.
So, where should we put the debt that makes up a large part of our holdings?
You'll need to look at debt funds when you've exhausted the tax-free and trustworthy choices of EPF, PPF, Sukanya Account, etc. This is especially true if your portfolio has increased significantly. If your portfolio has to be rebalanced from equity to debt during bull markets or vice versa during bad markets, debt funds might be a lifesaver.
debt fund types that are well-suited to long-term objectives
The following forms of debt can be employed to begin building your long-term portfolio
Short Duration Funds -
Short-term funds invest primarily in securities with maturities of one to three years.
Dynamic Bond Funds -
As a result of this flexibility, these funds can invest in bonds of any length, from a few months to several years, depending on the fund manager's expectations for returns.
Banking & PSU Funds -
They invest in bonds issued by banks, PSUs and other public financial institutions primarily.
Those who are ready to accept a larger degree of volatility in the near term and/or are willing to assume a greater degree of risk can also explore these two options.
Corporate Bond Funds -
Investments in high-quality corporate bonds/papers are the primary focus of these funds.
Investments in Gilt/Constant Maturity Funds - These funds invest mostly in securities issued by the government throughout periods and predominantly in government instruments across periods such that the average maturity is continuously kept around 10 years each. There is no default risk with them because they are backed by the government. However, short-term interest rate fluctuations can have a significant impact on these.
How should debt money in the suggested categories be combined?
After you've narrowed down the categories, you'll need to choose a few schemes from each.
Depending on where we are in the interest rate cycle, debt portfolios with varying maturities respond differently. Make careful to select funds from a variety of categories so that you may build portfolios of varying maturities. The goal is to build a debt portfolio that will not require you to continually worry about making a move based on the current rate-cycle calls. Even if one of your categories isn't doing well, you can always turn to another one of your investments to make up the difference. You won't have to make frequent adjustments to your investment portfolio, so avoiding the needless imposition of capital gains tax.
So a well-balanced long-term portfolio might benefit from a combination of short- and long-term investment options.
The following are a few probable pairings:
Fusing short-term funds with dynamic bonds or banking & PSU debt funds or some other combination of the aforementioned
Short Duration Funds, Dynamic Bond Funds, Corporate Bond Funds, or Short Duration Funds can be combined.
Merging several types of funds, such as those that specialise in short-term investments, dynamic bond funds, and gilt/constant maturity funds.
Combining strategies from the Short Duration Fund, Corporate Bond Fund, Gilt/Constant Maturity Fund, and others.
Please keep in mind that your specific needs may necessitate a different combination. So keep that in mind while making your choice, or seek the advice of an investing expert.
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