Article written by Sherin Dev; Follow my Twitter or Facebook page
Any investment instrument that provide fixed income and safety against capital lose can define as debt instrument. In my previous article, Investment Portfolio for Beginners, you are able to find the requirements of having debt instruments in a portfolio along with its role and importance. This article justifies those points by elaborating the reasons why one should add debt instruments to the portfolio and what are the major benefits from it.
People generally love to have instruments that grow the money fast. Financial advisers prefer equity investments to build wealth for a long run. I too agree. But, meant only for long run, selling equity investments early would bring capital loses to the investors. What would happen if I have short term goals and equity or such investments never able to meet those goals? Here is the role of debt instruments. Below are some points that helpful to know hoe debt instruments are able to help us to meet short term goals.
Money in Debt Instruments are Safe
Most of the debt instruments are backed by governments or have regulatory appointed by government. Thus the money invested with debt instruments provides high safety and liquidity. Investor can sell or redeem the instruments whenever they required money. Bank Fixed Deposits and Government Bonds all comes to the debt instrument group. Some mutual funds like Liquid funds are also considered as debt funds. Through its superior guarantee and liquidity, having debt funds in a portfolio would help to meet short term goals.
A Friend to Low Risk Seeking Individuals
Debt funds have the ability to protect capital. This nature makes debts funds a best friend to the people who have less risk taking capacity. It doesn’t provide the money growth like equity, gold or real estate but, always give a guarantee on the capital invested in it.
Save tax through debt route
In a previous article you may have noticed that I wrote a portfolio should include tax saving instruments. Depends of the low in various countries, investments to selected debt funds are helpful to save tax to a great extend. However, individuals required to identify best debt options to avail tax benefits under the low of the country where they belongs to.
Availability of Systematic Investment Options
Mutual funds like debt and gilt funds have choice to invest money at a time or systematically. Availability of systematic investment option is helpful to those who are near to retirement or have particular goal to in a stipulated time. If such goals fall within 5 years, taking the route of systematic investment is the best option to build required capital over the period of time, systematically.
Work as an Emergency Fund within Portfolio
No one knows the arrival of emergencies to the life. Having an emergency fund is the best advisable option to meet any uncertainties and debt instruments are able to work better for that. Through its high liquidity nature, investments in debt instruments are suitable for individuals to raise immediate money to meet emergencies. Debts instruments have triple benefits: It would work as an emergency fund, would fetch more interests than savings account and protect against any possible lose of capital.
Conclusion
Debt instruments have important role in a portfolio. It generally provides capital safety and high liquidity. Including quality debt investments in a portfolio helpful to save tax, work as an emergency fund, meet short term goals etc… Debt instruments are the best friend for people who have low risk taking capacity and near or after the retirement. It also best to receive regular income if invest wisely to the fund which offers that facility like monthly income plans.