Eliminating risk from debt investments | Value Research Debt funds are safer than equity funds, but do not get into a mismatched product by putting your short-term money in a fund that is meant for long term
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Eliminating risk from debt investments

Debt funds are safer than equity funds, but do not get into a mismatched product by putting your short-term money in a fund that is meant for long term

Though debt funds sound similar to a fixed deposit, how does their dependency on FII money make them risky? Please explain what should we keep in mind when investing in debt funds.
-Raghunathan

One important thing which investors should note is that debt funds though volatile but are relatively safe as compared to equity funds. They are far safer than equity funds but they're not risk-free. Most investors make the mistake of comparing a debt fund with a fixed deposit and believe that their money will never go down. That is not true.

There are a variety of funds, liquid funds generally don't go down in value, but there has been one occasion when they also slipped on a 1-day basis. Otherwise, debt funds can go down in value if interest rates go up.

You can mitigate the risk from debt funds by defining your investment time frame. If you know your money will be parked for a certain duration, say 3 months, 6 months, 6 days or 2 years; you can choose an appropriate fund that will not disappoint you.

The problem arises when investors have short-term money, and invest in a fund which should ideally be held for a longer period. Such a fund can turn volatile in a short period and cause undue risk.

FIIs invest large amounts in debt funds and even move out their money on occasions. They bring a volatility that investors are not used to. It is important that you don't get into a mismatched product, or put short-term money into long-term debt funds.



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