The fundamental principle of investment is diversification. Experts frequently advise us not to “put all your eggs in one basket.” Diversification’s primary purpose is to lower your investment risk.
If you invest just in stock, you should consider diversification across asset classes. However, debt is another significant asset that may help diversify your investing portfolio.
Investors who wish to avoid stock market volatility and have a low-risk tolerance can consider investing in debt mutual funds. Debt is a less volatile asset class that contributes to portfolio stability.
Some of the Most Common Types of Debt Funds Include:
- Government bond funds: These funds invest in government-issued bonds. Government bonds are one of the safest investments available but provide lesser yields.
- Corporate bond funds: These funds make investments in corporate bonds. Corporate bonds are riskier than government bonds but have a more significant potential return.
- Municipal bond funds: As per debt fund meaning, these funds invest in state and local government bonds. Municipal bonds are frequently accessible from federal income tax, making them suitable for investors with high tax rates.
- Money market funds: These investments are made in short-term debt instruments such as Treasury bills and commercial paper. Money market funds are the most secure debt fund, but they also provide the lowest returns.
Tips to Help You Diversify During the Market Volatility
Avoid Investing a Lump Sum Amount
Having established the importance of diversification, the initial step is steering clear of investing a lump sum amount. While the pullto low market prices may be tempting, assuming that the markets have reached their lowest point can be counterproductive.
Given the unpredictable nature of markets, especially in the face of unprecedented events like the Covid outbreak, attempting to time the markets by making a lump sum investment carries significant risk. Substantial losses could ensue if the markets continue to decline after your investment. Even if you possess a lump sum for investment, deploying it gradually while closely monitoring the evolving situation is prudent.
Invest in Mutual Funds via Systematic Investment Plans
Systematic Investment Plans (SIPs) are inherently crafted to navigate volatile markets. They involve investing a fixed amount at regular intervals, irrespective of market conditions. This approach leads to Rupee Cost Averaging over time, resulting in a lower average purchase price and an increased potential for significant gains. Additionally, SIPs shield investors from the risk of entering the markets at inopportune times.
Utilising SIPs can be an effective strategy to diversify your portfolio without the concern of market timing. You stand to benefit through consistent investments even during market downturns, as more units are allocated for the same investment amount. This proves advantageous in the long run, potentially yielding substantial gains.
Invest in Equities for a Longer Horizon
Assuming you clearly understand certain investment principles, such as prioritising securities with low correlation, considering SIPs, and avoiding lump-sum investments. Another critical element of diversification during market volatility is the investment horizon.
Volatility in markets poses risks for short-term investors. Examining the historical performance of markets reveals that, although markets have consistently exhibited volatility, they have rebounded from crashes and substantial correction phases. While past performance doesn’t guarantee future results, the inherent nature of the economy and markets suggests a tendency to recover.
Diversify Your Debt Investments
Typically, investors often emphasise diversification primarily in equity. In the realm of debt investments, they may opt for either a secure debt fund or direct investments in specific debt instruments without considering the correlation between them.
In the prevailing market and economic conditions, diversifying debt investments also becomes crucial. A range of debt funds is suitable for diversification, including income funds, dynamic bond funds, liquid funds, credit opportunities funds, short-term funds, and ultra-short-term funds.
Take a closer look at your debt portfolio and invest in funds that exhibit no correlation with your current investments.
While possessing certain limitations, debt funds continue to remain among the top investment choices for risk-averse investors seeking a steady income stream. These funds serve as practical tools for diversifying your portfolio and mitigating overall mutual fund risk. A diverse range of debt mutual funds is available for investment, allowing you to select an appropriate scheme based on your investment horizon, risk tolerance, and financial objectives.