When growing your wealth through fixed-income instruments, debt mutual funds emerge as a compelling option, outshining direct bond investments. These funds, managed by financial experts, offer a range of advantages that make them a great investment plan for retail investors like you.
Let’s understand how debt mutual funds stand tall in this financial journey and provide a great and efficient avenue to achieve your investment goals.
5 reasons why debt mutual funds work better than direct bond investments
Here are 5 key reasons why debt mutual funds may work better than bonds for you:
Debt mutual funds invest in a diversified portfolio of bonds and money market instruments. This diversification helps reduce risk. If one issuer’s bonds default or lose value, it only impacts a small part of the fund. In contrast, investing directly in bonds exposes you to the risk of a single issuer. Debt funds are also professionally managed so fund managers can anticipate and mitigate risks.
Open-ended debt mutual funds allow you to withdraw your money without penalty. The fund houses are obligated to redeem your units at the Net Asset Value (NAV). On the other hand, if you invest directly in bonds, you are locked-in until maturity. You can only exit early by selling the bonds in the secondary market, where you may have to sell at a loss. Debt funds provide easy entry and exit, making them a great investment plan in India.
Debt mutual funds benefit from economies of scale, which translates to lower costs. They can keep costs low while still providing active management and research. In comparison, investing directly in bonds requires paying brokerage charges and commissions, raising your costs. The lower costs of debt funds may mean higher returns for you.
Debt fund managers are experts in bond markets and fixed-income securities. They know how to analyse bonds, assess risk, and capture opportunities. They make strategic decisions to optimise returns while managing risks. As an individual investor, you may lack the knowledge and experience to invest in bonds and manage a portfolio directly. Debt funds offer the benefit of professional management of your money.
Wide range of options
When you invest in debt mutual funds, you get to choose from a wide range of options – from long-term debt funds to government bond mutual funds, you can decide which to invest in according to your investment horizon and risk tolerance. Depending on the credit quality and investment horizon, there are about 16 types of debt mutual funds available. With bonds, however, such a wide variety of options is not available.
To wrap up
As you can now tell, there are several advantages of investing in debt mutual funds versus purchasing bonds directly. So, if you are looking to invest in fixed-income assets, don’t overlook the compelling avenue of debt mutual funds. They may be the most prudent choice for your portfolio.