Diversity is a sign of a well-balanced investment portfolio. Pooling all of your money in one place can be a risky investment strategy. Often, investors look at a variety of assets for their financial portfolios. Many investors look to Wall Street as a great avenue for growing their wealth. However, there are many other options available for your portfolio.
Common areas to invest in besides the stock market are bonds, money markets, and real estate. Each of these investments takes a more hands-on approach, and they are subject to the volatility of the market. If you are looking to add a more consistent revenue source to your portfolio, consider investing in a debt fund.
What is a Debt Service Fund?
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When you invest in a debt fund, it is typically made up of dozens to even hundreds of debt securities grouped into a singular investment. As an investor, you do not actually own the debt, just shares of the fund. However, you do participate indirectly in the interest paid out on the debt itself. Debt funds can be purchased through brokerage companies and mutual fund firms. Advisors can help you select the right fund for your portfolio.
Benefits of Investing
Debt funds give you a high return on your money with a low volatility level. In addition to having a low-risk assessment, take a look at the following additional benefits.
- Consistent revenue. You know precisely when your investment will pay out and at what rate. Though debt funds have a smaller risk level than other fund types, their returns cannot be guaranteed as all investments are subject to fluctuations within the market.
- Tax considerations. Debt funds are only taxed when they are cashed out. If cashed out before the three-year mark, you will pay short-term gains, while after three years, you will pay the long-term gains rate.
- Very solvent. Debt service funds do not lock you into a specific period. If you want to pull out your money before the maturation date, you can. However, there is the chance you will take a hit from a fee known as an exit load. This is charged to prevent early withdrawals, and the amount can change depending on which fund type you have. Not all fund types carry this charge, allowing you to take your money from the fund whenever you choose with no penalty.
- Easy adjustments. Debt funds use a systematic transfer plan to take chunks of money from one program and deposit it into another. For example, if you have $20,000 to invest, you can put it into a debt fund and schedule it to transfer into equities. This process reduces your overall risk output and gives you a little more control.
Types of Debt Funds
With an understanding of portfolio investing, you can begin exploring different types of debt funds based on risk levels. The choices you invest in depend on your risk tolerance, the fit with your current portfolio, and your investing goals. Take a look below for your debt fund options.
Liquid funds
Liquid funds are ultra low-risk. These funds move quickly. Most mature by at least the 91-day mark, if not sooner.
Short-term funds
Short terms mature in one to three years and generally aren’t affected by interest rates. A short-term fund example is the Axis short-term fund growth.
Medium-term funds
The length of this fund type is typically three to five years. An example of a medium-term debt fund is a real estate debt fund.
Long-term funds
Your long-term funds will take at least five years before they hit their maturation date. These carry a higher interest rate risk since they are held for so long.
Dynamic bond funds
Your fund’s manager adjusts dynamic bonds as they forecast interest rate changes. Because of this, the maturity date can be flexible. Some can be 1 to 3 years, while others will fall into the 3- to 5-year range. This fund type also carries a higher level of risk than its shorter-term counterparts.
Fixed maturity plans (FMP)
If you choose to invest in an FMP, you will be locked in for a specific time frame. This can fluctuate base on which plan you pick. Investing happens within the beginning offer time frame only. Once that period ends, you are invested until the maturation date. While similar to a fixed deposit, their only similarity is the lock-in. Fixed deposits offer a set return, while FMPs provide better tax efficiency.
How to Invest
To invest in a debt fund, you can go directly through an online account, use a broker, or investment firm. Brokerages can manage your funds and their timelines for you. They can also help you decide which of the numerous debt funds will be better suited for your portfolio. Once you choose your investment fund type, whether it be a medium-term real estate debt fund or a dynamic bond fund, you can invest your money in a lump-sum investment or a systematic investment plan.
Lump-sum investments are for investors who want to place a large sum of money into a fund but all at once. Systematic investment plans (SIPs) take a larger sum and slowly invest it into various programs over time. While SIPs take a slower approach, it gives you more control over your dollar amounts, giving you better gain percentages.
Investing your money boils down to calculating your specific investment goals. If you are looking to reduce your overall tax liability at the time of investment, a lump-sum would likely be the best option. If you are investing to grow your wealth at a steady rate, you may want to consider systematic investment plans. If you have more investing questions or want to start investing yourself, feel free to reach out to us at Titan Funding,