In the last video, we discussed equity mutual funds. Equities can be thought about as the growth asset class—they are volatile, but they have the highest expected returns. Now, in a portfolio that has a volatile asset class like equity, you need something stable to reduce the volatility as well as diversify. Why? Because having multiple asset classes that rise and fall at the same time makes no sense. This is the role that debt funds play. Debt funds invest in bonds issued by govt and companies when they borrow money. Bonds are less volatile than equities but offer stable and predictable returns. In this video, Karthik explains the basics of debt funds and the key risks.
To learn more about debt funds, check out this chapter: