Last Updated on February 13, 2022 at 7:47 am
Suresh asks, “Can you please write an article on which type of debt mutual fund should be used for a long-term financial goal? Can we use liquid funds for these?”
For those who make the effort to understand how they work, debt mutual funds offer unique benefits. That said, most retail investors can stick to overnight funds, liquid funds and money market funds for most of their goals. These invest in short-term bonds with (typically) good credit quality.
The NAV of a debt fund fluctuates as per the demand and supply forces in the market. In normal situations, a debt fund holding long term bonds will fluctuate more than a debt fund holding short-term bonds.
Those who wish to learn more about debt mutual funds can use our free E-book: A Beginner’s Guide To Investing in Debt Mutual Funds and our monthly debt fund screeners can be used for selection learning and tracking.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
There is absolutely nothing wrong with using a liquid fund or a money market fund as the debt component of a long term portfolio with or without other debt products like EPF or PPF. In a long term portfolio with significant equity, debt mutual funds help with two-way rebalancing. That is from equity to the debt fund when there is a bull market and vice-versa during a bear market.
Investors who can appreciate and tolerate the risks associated with a gilt fund can also reap the benefits over the long term.
The 10-year rolling returns of 1Y treasury bill index vs long term gilt index vs Nifty 500 TRI vs portfolio with 50% equity and 50% of the T-bill index and gilt index are shown below. There are 5992 data points in each line.
![10-year rolling returns of 1Y treasury bill index vs long term gilt index vs Nifty 500 TRI vs portfolio with 50% equity and 50% of the T-bill index and gilt index 10-year rolling returns of 1Y treasury bill index vs long term gilt index vs Nifty 500 TRI vs portfolio with 50% equity and 50% of the T-bill index and gilt index](https://freefincal.com/wp-content/uploads/2022/02/10-year-rolling-returns-of-1Y-treasury-bill-index-vs-long-term-gilt-index-vs-Nifty-500-TRI-vs-portfolio-with-50-equity-and-50-of-the-T-bill-index-and-gilt-index.jpg)
Notice that the 10Y gilt index return are comfortably about the 1Y Treasury bill index (this is used as a proxy for liquid funds and money market funds). So naturally, a 50% equity + 50% gilt portfolio will be more rewarding than a 50% equity and a 50% T-bill portfolio.
We have assumed a simplistic daily rebalance here. A standard annual rebalancing is not expected to be too different.
The results over 15 years are shown below. There are 4429 data points in each line. The general observations are also the same.
![15-year rolling returns of 1Y treasury bill index vs long term gilt index vs Nifty 500 TRI vs portfolio with 50% equity and 50% of the T-bill index and gilt index 15-year rolling returns of 1Y treasury bill index vs long term gilt index vs Nifty 500 TRI vs portfolio with 50% equity and 50% of the T-bill index and gilt index](https://freefincal.com/wp-content/uploads/2022/02/15-year-rolling-returns-of-1Y-treasury-bill-index-vs-long-term-gilt-index-vs-Nifty-500-TRI-vs-portfolio-with-50-equity-and-50-of-the-T-bill-index-and-gilt-index.jpg)
The role play by asset allocation in reducing the volatility (potential return spread) of equity can also be seen from the above graphs. Also see: PPF vs Gilt mutual funds: Which has done better over 15 years?
In summary, investors who can appreciate and tolerate gilt volatility are likely to be rewarded over the long term. There is however nothing wrong with using short-term debt funds like money market funds or even liquid funds in a long term portfolio.
Additional resources on gilt mutual funds
- How to choose a gilt mutual fund
- FAQ on gilt mutual funds: essentials investors should know
- Gilt funds vs Dynamic Bond Funds vs Corporate Bond Funds: Which is the better choice?
- If equity MF returns are negative will gilt MF returns be positive?
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
![Follow Freefincal on Google News Follow Freefincal on Google News](https://freefincal.com/wp-content/uploads/2023/07/Follow-Freefincal-on-Google-News.jpg)
![Subscribe to the freefincal Youtube Channel Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.](https://freefincal.com/wp-content/uploads/2023/07/Subscribe-to-the-freefincal-Youtube-Channel.jpg)
![Follow freefincal on WhatsApp Channel Follow freefincal on WhatsApp Channel](https://freefincal.com/wp-content/uploads/2023/09/Follow-freefincal-on-WhatsApp-Channel-300x83.jpg)
![Listen to the Lets Get Rich with Pattu Podcast Listen to the Lets Get Rich with Pattu Podcast](https://freefincal.com/wp-content/uploads/2023/07/Listen-to-the-Lets-Get-Rich-with-Pattu-Podcast.jpg)
![Lets Get RICH With PATTU podcast on YouTube Lets Get RICH With PATTU podcast on YouTube](https://freefincal.com/wp-content/uploads/2023/08/Lets-Get-RICH-With-PATTU-podcast-on-YouTube-644x362.jpg)
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
![Pattabiraman editor freefincal](https://freefincal.com/wp-content/uploads/2019/11/Pattabiraman-author-freefincal-article-bottom.jpg)
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
![Both boy and girl version covers of Chinchu gets a superpower](https://freefincal.com/wp-content/uploads/2021/02/Article-bottom-Chinchu-gets-a-superpower-front-cover-for-girls-and-boys.jpg)
![Feedback from a young reader after reading Chinchu gets a Superpower (small version)](https://freefincal.com/wp-content/uploads/2021/02/For-bottom-Feedback-from-a-young-reader-after-reading-Chinchu-gets-a-superpower.jpg)
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
![You can be rich too with goal based investing](https://freefincal.com/wp-content/uploads/2016/11/You-can-be-rich-243x300.jpg)
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
![Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you want](https://freefincal.com/wp-content/uploads/2017/05/2-mini-Cover-pink.jpg)
Your Ultimate Guide to Travel
![Travel-Training-Kit-Cover-new](https://freefincal.com/wp-content/uploads/2019/11/Travel-Training-Kit-Cover-new.jpg)