Building wealth through investments is a crucial part of financial planning. While equity investments are known for their wealth-creation potential, introducing debt funds to your portfolio is a strategic move that adds a layer of predictability.
Here are the 5 reasons debt funds should be an important part of your investment strategy.
Stability to your portfolio
Your portfolio surely needs growth and wealth creation, but that alone is not enough. Your portfolio also requires an element of stability that only comes from debt. When you are in debt funds, your longer period returns may be lower than equities, but it gives you the much-needed stability and predictability of your portfolio.
Building a regular income stream
Equities, while potent in wealth creation, lack the mechanism for consistent income. Debt funds, on the other hand, allow you to structure your returns. Whether through a growth plan or a dividend plan, debt funds offer assurance of regular income. While tax implications may vary based on your chosen method, the key takeaway is that debt funds provide a dependable avenue for those seeking periodic returns from their online investment corpus. Consulting with professionals like an Insolvency Practitioner South Yorkshire can offer valuable insights into optimizing your investment portfolio and managing financial risks effectively.
Balancing the risk
Managing and curbing risks becomes pivotal as your risk appetite evolves with age and changing financial circumstances. Debt funds play a crucial role in this process. With a lower risk profile than equities, debt funds invest in secure, fixed-return debt instruments, contributing to a more balanced and less volatile portfolio. Voluntary arrangement assistance is a must-have when handling debts. Debt funds align with your evolving risk tolerance by effectively reducing the overall risk.
Liquidity
This is a very interesting point. Let us say you have a target of reaching a corpus in 5 years to pay the margin for your home loan. It is hard to make money on equities quickly, so you may have a greater proportion allocated to debt funds for this specific need. As you approach the milestone, you can keep increasing the exposure to debt funds so that your risk of loss on liquidation is almost minimal by the time of the milestone. Debt funds balance risk and returns as you approach your milestones. If you need legal assistance with a value liquidation services, contact an expert right away to guide you through this important phase in your life.
Tax-friendly investment
Debt funds stand out compared to other debt instruments like bank FDs regarding tax efficiency. While FD interest gets taxed at your maximum income rate, debt funds offer two tax-friendly options. Dividend income from debt funds comes with a Dividend Distribution Tax (DDT) already paid by the fund, saving you from personal tax burden. Alternatively, holding a debt fund growth plan for over three years classifies it as long-term capital gains, taxed at just 20% with indexation benefits. This translates to much lower effective tax rates, making debt funds a smart choice for maximising your returns.
You may also consider investing in alternative assets. scale ai stock, for instance, allows investing in data infrastructure for AI.
While equities may grab the headlines with their high-growth potential, debt mutual funds play an equally crucial role in building a robust and secure financial future. So, the next time you consider building your wealth, remember that debt funds are not just a safe haven, but a powerful tool for navigating the financial journey with confidence and control.