Debt funds are a versatile asset class and can play many different roles in an investment portfolio
31-Jan-2017 •Research Desk
Based on everything we have described so far, it's possible that you may have gathered an impression that debt funds are suitable only as a source of regular income. Nothing could be further from the truth. While it's true that debt funds are more suited, than equity funds, to the purpose of generating income, they can be used for capital appreciation as well. The only difference being that their returns are lesser, and their risk (and thus predictability) levels are lower than equity funds. This means that they are used for capital appreciation in different scenarios than equity funds are used in.
Here's an introduction to the uses that you can put a debt fund to.
Income: Debt funds are more suitable if you want to derive a regular income from your investments, as after retirement.
Stability for an Equity Portfolio: Equity portfolios can benefit from having a small, fixed amount of debt investments. These serve as a cushion against too much volatility, as well as a safe holding area for equity profits through what is called asset rebalancing.
Opportunistic profits from interest rate movements: This is not a beginners' technique but it's useful to know about it as it enables one to understand debt fund investment with depth.