Although debt funds also face some market risks, but such funds are very much trusted as investments are made in secure fixed-income instruments like government securities, debentures, bonds, treasury bills.
Mutual fund (MF) investments are subject to market risks, but the types of risks in debt and equity funds differ. As debt funds invest in fixed income instruments, such MFs are considered as more stable than equity funds, which get directly affected by fluctuations in the stock markets.
However, volatility is the characteristics of stock markets, which provides opportunity for equity funds to provide greater return in the long term despite frequent fluctuations causing greater risks in the short term. On the other hand, fluctuations in debt funds are rare. So, in case of any downward movement, it will take a longer time to recover as it will take time for upward movement.
Although debt funds also face some market risks, but such funds are very much trusted as investments are made in secure fixed-income instruments like government securities, debentures, bonds, treasury bills. Such investments also make returns more or less predictable, with very little chance of higher or lower returns. On the other hand, short-term return of equity funds are very much unpredictable, but the chance of higher return in long term is high.
So, if you want stability along with benefit of equity return, you have to opt for a blend of both debt and equity, which Hybrid Mutual Funds offer. In hybrid category also, there are three types of funds depending on proportion of debt and equity, which are equity-oriented hybrid funds for aggressive investors, debt-oriented hybrid funds for conservative investors and balanced hybrid fund for less adventurous investors.
If you want predictable with probability of slightly higher return, you should opt for debt-oriented hybrid fund. Such funds invest at least 60 per cent of money in debt instruments and rest in equities or equity-related instruments. With majority of money – which may go up to 100 per cent, depending on market conditions – invested in conservative debt segment, such funds provide stability along with the chance of getting higher equity return by taking opportunity to invest up to 40 per cent of money in equity segment.
With some degree of predictability, such funds may also be used for regular income purpose by using systematic withdrawal plan (SWP). However, capital gains will be taxed according to debt MFs and indexation benefits will be available on long-term capital gains (LTCG) on redemption made after three years from the date of investment.