Find Out If You Should Include Debt Funds In Your Equity Heavy Mutual Fund Portfolio

Never put all your eggs in one basket. I am sure almost every one of us, irrespective of whether you are an investor or not, must have heard about this quote, right?

But have you ever tried understanding the logic behind this saying? The answer is risk mitigation.

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Simply put, when you put all your hard-earned money into a single investment tool or asset class, the returns are entirely dependent on the performance of that instrument, right?

If it soars high and you redeem it, well and good. But what if it bleeds red? You end up sitting on a pile of losses, right?

That's exactly why it's always advisable to diversify your investment portfolio. After all, how can you solely depend on a single investment vehicle or asset classĄ¯ returns?

And this holds especially true if you are betting big on a risky asset class like equities by having an all-equity mutual fund portfolio.

The Risks Of Having An All-Equity Portfolio

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While thereĄ¯s no doubt that equity mutual funds can indeed be your best friend for long-term investments, they are relatively much riskier in the short term due to stock market volatility. Even if you are fetching high returns in the short term as well, do not commit the mistake of getting overconfident, as the market has its own share of downfalls as well, or at worse, market crashes.

Although your equity-heavy portfolio which at present might be shining in green with high returns due to the soaring market at present, it's better to have debt funds in the portfolio, to soak in the benefits of diversification.

Wondering why and how? Read on as we unfold the same.

Also Read: Frequently (Not) Asked Questions - How Much Tax Am I Paying On My Mutual Fund Investment?

Why Inject Debt Funds Into Your Otherwise All Equity Portfolio?

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Risk and returns. These are the two driving factors behind the whole gamut of having an investment portfolio.

Minimizing the risk and maximizing the rewards to the extent possible should be the two goals that anchor your investment in various asset classes and chosen funds.

That's exactly what diversification does. Instead of sticking to a single investment avenue or asset class, diversifying into two or more would enable you to bear the fruits of balancing risk-reward ratio through asset allocation, especially when the chosen investments have a negative correlation, such as equity and debt.

So, in the case of those having an all-equity investment portfolio, sliding in a level of diversification through debt mutual funds can turn out to be a wise move. It can provide your portfolio with the much-needed capital protection and stability, especially to deal with the downsides of a volatile market, wherein redeeming an all-equity portfolio can lead to incurring huge losses and make your portfolio bleed red.

And that's not all. If you wish to understand and know more about the diversification of mutual fund portfolios and the associated benefits, click here.

Also Read: Debt Funds vs FD - Which Is The Best Investment Option?

How To Diversify Equity Portfolio With Debt Funds?

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When it comes to diversification of an equity-heavy mutual fund portfolio, the investor can go for debt allocation to provide a balance to their portfolio and a cushion to shield them from the volatility of equities.

Now, the question arises-How to invest in debt mutual funds for diversification? You can do so in two ways.

One is by investing in pure debt investment avenues like a corporate bond fund, overnight fund, liquid fund, low duration fund, ultra-short duration fund, etc.

The second is to opt for the other category of mutual funds schemes, i.e. hybrid funds.

Those choosing the former option of investing in pure debt schemes should keep in mind that such an investment strategy would involve a lot of research and decision-making regarding each of these debt schemes and their historic returns. Click Here to know more about debt mutual funds and click here to understand how to pick the right mutual funds.

Whereas on the other hand, those who wish to go for hybrid funds to add the debt component in their mutual fund portfolio, would have an easier way out as the chosen hybrid schemeĄ¯s fund manager will take care of most of these aspects, thus saving a lot of time for the investor, and also ensuring that the fund managerĄ¯s expertise and knowledge are the driving factors behind the fundĄ¯s selection of investments.

Also Read: Frequently (Not) Asked Questions - How Safe Is My Money With Mutual Funds?

What Are Hybrid Funds?

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For the uninitiated, hybrid mutual funds invest in two or more asset classes, which is usually a combination of equity and debt in most cases. They are aimed to offer a balanced component to your portfolio while also taking care of achieving the set investment objective of that scheme.

And due to the presence of both equity and debt investments, hybrid funds are able to offer the twin benefits of high potential returns during the equity market boom and capital protection through the debt component, to tackle the equity market downfalls.

Hence, hybrid funds often serve as a suitable investment avenue for those investors who are willing to get the taste of equities and their potentially high returns, without getting entirely exposed to the volatility of the equity market.

Although the risk in hybrid funds would depend upon the proportion of equity holding in its portfolio, this degree of risk would certainly be lower than that of an all-equity investment portfolio. So, the presence of debt components in hybrid funds is what offers the investor capital protection and stability, apart from acting as a cushion during market downsides.

Also Read: When To Exit From Your Mutual Fund Investment? 5 Trigger Points To Remember

Final Words

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While there is no one-stop guide or rule for successful investing in mutual funds, the simple steps of choosing the right investment avenues (in terms of both asset class diversification and fund selection) as per your investment horizon and risk appetite, remaining invested for the long term (especially with equities) and periodically reviewing your portfolio performance and rebalancing if need be, hold key to wealth creation. If you are unsure about how to choose the right mutual funds, click here.

Also Read: Does It Make Sense To Take The SIP Route For Mutual Fund Investments?

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