Should young investors avoid debt mutual funds? Experts explain why debt can still matter in your 20s and 30s

Young investors often hear that they have decades ahead of them and can therefore afford to take higher equity risk. While equity can indeed remain the core of a portfolio for long-term wealth creation, experts say this does not mean investors in their 20s or early 30s should avoid debt mutual funds altogether.

Debt can play a role in providing stability, liquidity and diversification, particularly when the investment goal is closer or when market volatility makes it difficult to stay invested.

Sanjiv Bajaj, Joint Chairman & MD, Bajaj Capital , said young investors should not look at the equity-versus-debt decision in black-and-white terms.

A 25-year-old may have a long investment journey and therefore more room to take equity risk. However, investing is not only about pursuing the highest possible return. Having some debt in the portfolio can provide a cushion during periods of equity-market volatility and make it easier for investors to stay invested rather than make panic-driven decisions.

“Debt” therefore need not be viewed as an asset class that holds a young investor's portfolio back. Instead, it can help the investor stay invested in the higher-risk portion of the portfolio.

Krishanu Choudhary, Director & Unit Head, Anand Rathi Wealth , said the debt component remains important across age groups because it can provide stability, liquidity and diversification.

A combination of assets that are less correlated with each other can help reduce overall portfolio volatility and concentration risk, allowing investors to navigate different market cycles more comfortably.

Instead of applying a formula based solely on age, investors should first ask when they will need the money, Bajaj said.

For example, someone who needs money within the next one or two years may not be suited to a high-equity allocation merely because they are young. Conversely, money meant for a goal 15 or 20 years away has more time to withstand market fluctuations.

Investors should therefore divide their investments into short-, medium- and long-term goals and decide the asset allocation for each goal.

Income stability, existing liabilities and an individual's actual comfort with market volatility should also be considered. Two people of the same age can have very different financial circumstances, and their portfolios do not necessarily need to have the same equity-debt mix.

Choudhary illustrated this with a 25-year-old investor who has three different goals: a holiday in one year, a wedding in three to five years and retirement in more than 25 years.

For the holiday goal, with a horizon of less than a year, a 100% debt allocation can be considered. For the wedding goal, he suggested an allocation of around 60:30:10 across equity, debt and gold. For retirement, with a horizon of more than five years, a higher equity allocation of around 80:20 across equity and debt can be considered.

The example highlights why age alone cannot determine asset allocation. Equity may remain the primary asset class for long-term wealth creation, while debt can support capital stability and liquidity for nearer-term goals.