The only way to ensure that your mutual fund portfolio is able to deliver maximum returns is by ensuring that it remains adequately diversified. Mutual funds are a pool of professionally managed funds that can be actively or passively managed. While index funds and exchange traded funds are good examples of passively managed funds, most mutual funds including equity and debt funds are actively managed. The fund managers are responsible for ensuring that they build a portfolio that is well-diversified and can deliver returns and outperform its underlying benchmark.

Although most people are after equity mutual funds because they offer better risk-adjusted returns, a lot of people prefer investing in debt mutual funds. Although debt funds do not offer returns as high as equity funds, they offer stability to an investor’s investment portfolio. Not everyone wants to earn high returns, some investors prefer stability and financial security. Since most debt funds invest in fixed income securities, there are very few chances of your investment portfolio incurring losses.

Those who invest in debt funds can expect stable returns irrespective of whether they go with the growth plan or dividend plan. If you invest in equity funds, you may receive dividends from time to time, but returns are never guaranteed. People who are currently unhappy with their investments in traditional avenues generally shift to debt mutual funds. But investors with an equity heavy portfolio can consider investing in debt funds too. It is never a good idea to depend on just one asset class for income generation. Depending on their risk appetite and investment objective, investors should invest in different asset classes like equity, debt, gold, etc. 

How can debt mutual funds help in times of market volatility?

Investors who are new to the gamut of mutual funds usually are convinced that all mutual fund investments revolve around equity and equity related instruments. However, very few are aware of the other investment options available under the mutual fund umbrella. Debt funds are one such option that can offer stability and deliver decent returns with minimum investment risk. As mentioned earlier, mutual fund investors should consider diversification. Investing in just one asset class will not only put pressure on one side but will also pave the way for concentration risk. On the other hand, if you invest in the right mix of equity and debt your mutual fund portfolio will be able to mitigate overall investment risk. For example, when the equity markets are performing and debt instruments are underperforming, investors can benefit from the investments made in equity mutual funds. Similarly, when equity markets turn volatile and it gets difficult for equity funds to deliver, debt funds can offer the necessary cushion. The investment portfolio of a debt fund is less likely to get affected by the fluctuations in the stock market and will continue to deliver and offer returns even in volatile markets.

To take further advantage of market volatility investors can opt for SIP in debt funds. Systematic Investment Plan allows investors to take advantage of market volatility by allotting more units when the NAVs are low. On the contrary, when the NAV is high in performing markets, investors receive fewer units. Since the markets are volatile and fluctuate frequently, over the long term investors can average out the cost of purchase and receive more units. This means their overall returns will supersede their investment sum. Although debt funds are less volatile, they are prone to credit risk and interest rate risk.