The current coronavirus pandemic has taken the entire world by shock. Apart from witnessing casualties in large numbers, the COVID-19 crisis has also affected the financial markets across the globe. Markets have hit an all-time low in the past three months, worrying investors whether they should withdraw their investments or wait for the markets to recover. In such turbulent times, it is always difficult to come to a conclusion. Some may argue that it is wiser to take your money out of all the market linked schemes and put it in your savings account, while others may feel that this is actually the opportunity to invest more so that when the markets recover in future, you benefit from it.
Whenever making an investment decision, investors are expected to determine their risk appetite. A risk appetite is a measure to support appropriate risk and identify a strategy for balancing the overall risk of an investor’s investment portfolio. There are few investors who do not wish to risk their finances at all and hence, prefer investing in lower interest rate offering schemes. On the other hand, there are few individuals who wish to give their portfolio an aggressive approach by investing in market linked schemes. If you too are keen on seeking market linked returns, you can consider investing in a mutual fund.
Debt mutual funds
Mutual funds have been misinterpreted by many. Those who are entirely new to investing feel that mutual fund investments equal equity investments. However, this is not entirely true. Mutual funds are a vehicle for pooling funds from investors sharing a common investment objective. This pool of funds is invested across the Indian economy depending on the nature of the scheme. A mutual fund is supposed to carry a diversified portfolio as it invests in equity, debt, corporate bonds, government securities, etc. among other asset classes.
Although equity funds are quite familiar among investors, those who carry a moderate or low risk appetite and are keen on rebalancing their portfolio can consider investing in debt funds. While equity funds invest predominantly in equity and equity related instruments, debt funds invest in fixed income securities. This is why debt funds carry less risk as compared to equity funds that predominantly invest in stocks.
How debt fund investments can rescue investors in COVID-19 crisis?
Debt bonds are generally issued by the government. They invest in fixed income securities that pay regular interest. Hence, debt fund investments carry far lower risk as compared to other mutual funds. Global economies have suffered in varying proportions, hence shifting from equity to debt at this point of time can actually save your investment portfolio from incurring further losses.
The coronavirus is spreading like wildfire not just across the world, but here in India too. Although we always try to stay positive, we never know when an exigency may arise. If you haven’t invested in a decent health plan, the medical expenses might eat up all your savings. In such turbulent times, building an emergency fund through liquid fund investments can be a feasible option. Liquid funds are debt funds that invest in securities that mature in 91 days. Hence, these can be a viable choice for parking your money rather than letting it sit idle in the bank. Some funds like medium to long duration funds that are ideal for investors with an investment horizon of three to five years. This means that you can invest in other funds apart from equity for the long term too.
Although debt funds are less risky than equity funds, they do not guarantee returns. Hence, investors are expected to first understand their risk tolerance and only then invest in mutual funds.
Mutual fund investments are subject to market risks, read all scheme related information carefully.