Younger investors have the world to their feet when it comes to investment opportunities. When you are young, you have the opportunity to start investing early so that you can build a decent corpus by the time you retire. A lot of young investors do not realize the importance of saving and prefer splashing on luxuries instead. However, if you really want to see yourself become financially stable in future then you will have to start investing now. Those who invest early even stand a chance of benefiting from the power of compounding. Compounding holds the potential to turn small investment amounts into wealthy corpuses.
There are usually two types of investors – those who are aggressive and do not mind taking added risk with the hope of earning better rewards in future. And then there are those who are completely risk averse and stick to conservative investment avenues instead that offer low fixed interest rates. If you are someone who has a moderate risk appetite and is seeking capital appreciation through market linked schemes, you can consider investing in mutual funds.
What are mutual funds?
In the recent past, mutual funds have gained traction among Indian investors. A lot of people are shifting from traditional investment tools to mutual funds because of the high risk/rewards ratio that they carry. What fund houses do is that they collect money from investors who share a common investment objective and invest this pool of funds across the Indian economy depending on the nature of the scheme. The money is invested mutually across multiple asset classes, hence the name mutual fund.
Mutual fund investors are allotted mutual fund units in quantum with the investment amount and depending on the fund’s existing NAV. The performance of a mutual fund highly depends on the performance of its underlying assets.
What are debt mutual funds?
SEBI has further categorized mutual funds based on their unique attributes like risk profile, investment objective, fund size, asset allocation, etc. While equity funds invest mostly in equity and equity related instruments, debt funds invest in fixed income securities. Debt funds invest in stock bonds, money bonds, treasury bills, government securities, etc. There are some debt issuing companies that borrow money from investors for raising funds and instead offer regular interest. That’s how a debt fund functions.
How can young investors build a mutual fund portfolio using debt funds?
As of now, there are around 16 sub categories under debt funds and investors depending on their risk appetite, investment horizon and risk appetite should consider diversifying their mutual fund portfolio using multiple debts funds.
Let’s see how young investors can make the most out of these various debt instruments and build a solid mutual fund portfolio:
Liquid funds
Liquid funds are ideal for anyone who wants to build an emergency fund. If you do not have a solid health plan, you can invest in a liquid fund to help you financially during exigencies. These funds invest in securities that come with a maturity period of just 91 days. Investors can easily redeem or withdraw their investments and liquidate them if and when necessary/
Gilt funds
Gilt funds are those debt funds that invest in high rated fixed income securities like central and state government bonds. Since these funds invest in high rated government securities, it is less likely for these funds to affect the performance of your mutual over portfolio.
Credit risk opportunities fund
A credit risk fund usually has the investment objective of generating capital gains by investing in debt and money market instruments across the yield curve and credit spectrum. A credit fund may invest a major portion of its total corpus in AA and below rated corporate bonds.
These are some of the debt funds that young investors can use to diversify their mutual fund portfolio. However, investors should seek the help of a financial advisor if they feel that they need further assistance in making an investment decision.