Debt Funds Can Help Stabilise Portfolios During Market Volatility, Says Mirae Asset’s Basant Bafna

Investors often focus heavily on equity for wealth creation, but ignoring debt investments can leave portfolios exposed to volatility. Speaking at IDFC FIRST Bank Presents Outlook Money 40 After 40, India’s biggest financial and retirement planning expo, Basant Bafna, Head – Fixed Income at Mirae Asset Investment Managers, explained how debt funds can help bring stability and balance to an investment portfolio.

He emphasised that while equity investments may generate higher returns over the long term, they also come with higher volatility. Debt investments, on the other hand, generally offer lower volatility and can act as a stabilising element in a diversified portfolio.

Why A Balanced Portfolio Matters

Bafna compared portfolio construction to maintaining a balanced diet. Just as the body needs different nutrients, investors need a mix of asset classes such as equity, fixed deposits, gold, real estate and debt funds.

Equity and equity mutual funds are often used for long-term wealth creation. However, debt funds can provide safety and relatively stable returns, especially during uncertain market conditions.

By diversifying across asset classes, investors can reduce overall portfolio risk while still working toward long-term financial goals.

Equity Vs Debt: Understanding The Risk Difference

According to Bafna, investors should clearly understand how equity and debt differ in terms of risk and return before choosing investments.

Equity investments tend to deliver better returns over the long term but come with high volatility and require a higher risk appetite.

Debt investments generally offer relatively lower returns but involve lower volatility and are more suitable for investors with low to moderate risk tolerance. They can also be appropriate for both short-term and long-term goals, depending on the type of debt fund chosen.

Why Short-Term Goals Need Attention

Bafna pointed out that investors often focus heavily on long-term goals such as retirement or wealth creation while ignoring short-term financial needs.

However, achieving long-term goals often requires managing several short-term goals along the way. If investors ignore these intermediate milestones, they may face liquidity challenges later.

“Return on capital can be more important than return on capital for certain goals,” he noted, stressing that capital protection becomes crucial when investment horizons are short.

Two Key Factors Before Choosing Debt Funds

Before selecting a debt fund, Bafna said investors should focus on two important factors: risk appetite and investment tenure.

Risk Appetite

Risk and return are directly related. In debt funds, risk can arise mainly from two sources: interest rate risk and credit risk.

Investors can check the riskometer and the Potential Risk Class (PRC) of a fund to understand its risk profile before investing.

Investment Tenure

Investment duration also plays an important role in selecting the right debt fund.

Shorter investment horizons typically require lower risk products, while longer tenures allow investors to take slightly higher duration exposure.

Choosing Debt Funds Based On Time Horizon

Bafna explained that different types of debt mutual funds are designed for different investment durations.

For very short tenures of up to three months, overnight funds or liquid funds may be suitable.

For investments between three months and one year, ultra-short duration, money market or low duration funds can be considered.

For horizons between one and three years, short-duration funds may be appropriate.

For investments exceeding three years, dynamic bond funds or gilt funds may be considered depending on the investor’s risk tolerance.

SIPs Can Also Be Used In Debt Funds

While many investors associate Systematic Investment Plans (SIPs) mainly with equity mutual funds, Bafna highlighted that systematic investment plans can also be used for debt funds.

Instead of trying to predict interest rate cycles or timing the market, investors can use the SIP route to invest regularly in debt funds. This approach allows disciplined investing and reduces the risk of poor timing decisions.

Case Studies: How Goals And Risk Profile Matter

To explain how investment choices vary across individuals, Bafna shared examples of two investors with different profiles.

In the first case, a 40-year-old man with a wife and a teenage child was described as a risk-averse investor who mainly prefers fixed deposits. His goal is to fund his child’s education within three years. For such investors, conservative higher-duration debt funds along with medium-duration funds may help manage the goal.

In another example, a 30-year-old single professional with a stable job and higher risk tolerance was planning a trip within a year. For such short-term goals, shorter-duration debt products can be used, along with selective allocation to duration funds where appropriate.

Key Takeaway For Investors

Bafna concluded by reminding investors that portfolio stability is just as important as growth.

Debt funds can help balance portfolios, manage short-term financial needs and provide relatively stable returns during volatile market periods. However, investors should carefully align their investments with their risk appetite, financial goals and investment time horizon before selecting a fund.