How to create a balanced portfolio with equity and debt mutual funds
As a mutual fund investor, you need to have a healthy mix of funds in your portfolio. This will not only help with mitigating risk but also decide the strengths and weaknesses of your portfolio. One of the most effective ways to build such a portfolio is by combining equity mutual funds and debt mutual funds in the right proportion. Each brings unique strengths to your investment strategy.
In this article, we’ll explore how you can use both types of funds to create a balanced portfolio that fits your risk appetite, time horizon, and financial objectives.
Understanding equity mutual funds
There are different types of equity mutual funds available – large cap, mid cap, small cap, sectoral, multi cap funds and many more. Each category carries a different level of risk and potential reward. For instance, large cap funds generally offer relatively more stability, while mid cap and small cap funds may carry higher risk but can potentially offer better returns during market upswings.
Equity mutual funds are suitable if you have a longer investment horizon like 5 years or more and are looking to grow your wealth in the long-term.
Understanding debt mutual funds
Debt mutual funds invest in fixed income instruments like government securities, corporate bonds, treasury bills, and other money market instruments. These funds aim to provide stable and predictable returns with relatively lower risk compared to equity funds.
Debt funds come in different forms as well—liquid funds, short-duration funds, gilt funds, and credit risk funds, among others. They are often used for short- to medium-term goals or to park surplus money for better returns than a savings account.
Debt funds help reduce portfolio volatility and provide a cushion during periods when equity markets are down.
Why balance equity and debt in your portfolio
- Risk management: Equity brings growth potential, but with risk. Debt helps moderate that risk, especially in volatile markets.
- Liquidity needs: Debt funds offer flexibility and are easier to redeem without significant impact from market swings.
- Goal alignment: Different goals like a down payment of a house in 2 years versus retirement in 20 years need different investment strategies. A balanced mix helps align your investments with each goal.
- Smoother returns: By combining both, your portfolio is less likely to see sharp losses in market downturns, making it easier to stay invested.
Rebalancing is key
Over time, the proportion of equity and debt in your portfolio may shift due to market movements. That’s why it’s important to review your portfolio periodically and rebalance it. Doing this once a year or when there’s a major market shift is usually sufficient for most investors.
The role of SIPs in building a balanced portfolio
Systematic Investment Plans (SIPs) allow you to invest regularly in both equity mutual funds and debt funds. This builds discipline and helps you benefit from rupee cost averaging. By setting up SIPs in both types of funds, you can automate your asset allocation and reduce the temptation to time the market.
Tracking your growth
Once you’ve set up your portfolio, it’s helpful to periodically track your progress. While reviewing your returns, also consider using a compounding calculator. This tool gives you an estimate of how your investments may grow over time based on your expected returns and duration.
A compounding calculator can be especially helpful for visualising long-term goals like retirement or children’s education. It reinforces the power of staying invested and helps you make informed decisions when reviewing or adjusting your portfolio.
Conclusion
Creating a balanced portfolio with equity mutual funds and debt mutual funds is about finding the mix that works for your needs and risk profile. Equity can offer potential growth, while debt adds relative stability. Together, they provide a foundation for meeting both short- and long-term financial goals. Over time, a well-balanced portfolio can help you grow wealth while navigating market ups and downs with more confidence.