Are Debt Mutual Funds Suitable for Conservative Investors?

Investing in debt mutual funds is popular among investors for its competitive returns and low risk. Investing in such mutual funds means investing in fixed-income assets like government bills, commercial papers, and bonds.

Having a lower risk factor, debt mutual funds are the favorite of conservative investors. This article will highlight if investing in debt mutual funds is safe or if there is any underlying factor in it.

Why are Debt Mutual Funds Considerable For Investors?

Debt mutual funds invest primarily in fixed-income securities to generate steady returns and growth of wealth. The risk in these types of funds is comparatively lower than in equity funds. So conservative investors also get inclined to invest in it.

It has several advantages that can attract cautious investors.

Comparatively Higher Returns:

Debt mutual funds are favorable options for those investors who do not want to delve into better returns compared to traditional fixed-income instruments like FDs or post office deposits. For example, UTI mutual funds, in particular, UTI Medium to Long Duration Fund Direct-Growth have given a 9% return in the last one year.

Low Risk:

If you compare debt mutual funds to equity funds, the risk factor is very low. It still gives the benefit of expert fund management and a part of it is also invested in the equity market but the overall risk factor is very low in debt funds.

Diversification:

Diversification in the portfolio is something that every investor longs for. By diversifying financial assets among different securities and issuers, debt funds balance investment portfolios.

Risks in Investing in Debt Mutual Funds For Conservative Investors:

Despite having several benefits, debt mutual funds have some risk factors associated with it. So before investing consider the facts given below.

Risk of Changing Interest Rate:

This can impact debt mutual funds that have an exposure in the bonds. Thus, while there is no market risk, debt funds are still impacted by interest rate risk.

Risk of Reinvestment:

Once the underlying investment such as bonds matures, the fund house has to reinvest the capital. If the market conditions are not favorable, it can impact the debt fund and investors as well.

Risk of Liquidity:

Some debt securities may be hard to liquidate. This can give a fund house a hard time to sell off their investment. However, mutual fund houses have expert managers who look after this responsibility quite efficiently. This can reduce the overall liquidity risk for investors.

Who Should Invest in Debt Mutual Funds?

Conservative mutual funds are a hybrid fund with both equity and debt securities. These funds come with lower risks which aim for the prevention of capital over returns. Conservative mutual fund has a portfolio of both debt securities (around 75 to 90%) and equity investments (around 10 to 25%).

Conservative investors can consider debt mutual funds. These funds can generate a decent return but it is not guaranteed. However, in the long run, it can add stability to an investment portfolio and provide diversification against equity investment. Thus, understand your risk tolerance level and goals before investing in debt mutual funds.

Popular Debt Mutual Funds in India by AUM

Fund NameNAVAUM 5 Year ReturnNippon India Corporate Bond Fund DirectRs. 59Rs. 4618 cr7.23%Aditya Birla Sun Life Medium Term PlanRs. 39Rs. 1920 cr10.02%Kotak Medium Term Fund DirectRs. 23Rs. 1656 cr7.57%Nippon India Income Fund Direct Plan Growth PlanRs. 94Rs. 427 cr6.97%Baroda BNP Paribas Dynamic Bond Fund DirectRs. 48Rs. 159 cr6.84%As of 8th Oct 2024

Conclusion:

Debt mutual funds offer security and competitive returns to investors. These funds are less risky than equity funds but not completely risk-free. Before investing, consider all the factors discussed above to reach your financial goals. For conservative investors, debt mutual funds can provide a safer investment option compared to equities, offering relatively stable returns. However, they are not completely risk-free due to potential interest rate changes and credit risks. Investors should focus on funds with a good credit rating and lower maturity periods to reduce risk. Assessing personal risk tolerance and aligning the investment with financial goals is essential before making any commitments. Conservative mutual funds are a hybrid fund with both equity and debt securities. This can impact debt mutual funds that have an exposure in the bonds. Thus, while there is no market risk, debt funds are still impacted by interest rate risk.