scorecardresearchIs is the time to start buying debt mutual funds?

Is is the time to start buying debt mutual funds?

Updated: 24 Dec 2022, 11:10 AM IST
TL;DR.
It is vital to allocate a part of your investment to debt mutual funds to keep your portfolio healthy and diverse that strikes a harmonious balance between risk and returns.
As the interest rate hike cycle is apparently coming to an end, it is advised to explore long term debt funds

As the interest rate hike cycle is apparently coming to an end, it is advised to explore long term debt funds

For a new investor – commencement of an investment journey is as vital as reaching the final destination aka meeting the financial goals. More often than not, financial experts advise investors to invest in equity assets for the huge earning potential they offer. However, the right kind of portfolio is, invariably, diversified.

So, taking too much of risk in order to earn a higher rate of return is a practice that needs to be avoided – and it is advisable to allocate a part of portfolio to fixed income instruments such as debt mutual funds.

Investing universe

As on November 30, 2022, there were 311 debt mutual fund schemes which saw an inflow of 3,668 crore during the month. Net assets under management for these schemes stand at 12.56 lakh crore.

In the month of October, however, there were 318 schemes with net outflow of 2,817 crore and net assets under management (AUM) of 12.44 lakh crore.

MonthNo. of debt schemes                     Inflow ( crore) AUM ( crore)
October                                                 318(-) 2,81712.44 lakh
November311                                                      3,66812.56 lakh

Why should you invest?

Debt funds are a viable option for those investors who want the safety of fixed deposit but look for relatively higher returns.

ALSO READ: Should you use debt funds as alternatives to fixed deposits? We explain

A debt fund is a mutual fund scheme that invests in fixed income instruments, such as corporate and government bonds, corporate debt securities, and money market instruments etc. that offer capital appreciation. They are also known as fixed income funds or bond funds.

They have low-cost structure, offer relatively stable returns, high liquidity and reasonable safety. These funds are good for risk-averse investors who want regular income. They are less volatile and less risky than equity funds.

So, those investors who tend to invest in traditional fixed income products such as FDs, and are looking for steady returns with low volatility, debt mutual funds could be a better option.

Impact of interest rates

When interest rates go up, bond funds generate less returns. When the interest rates go up, the price of long-term bonds will fall in order to let its yield align with the increased interest rates.

Conversely, when the interest rates fall, the bonds which have a higher coupon rate will become more in demand and their price will rise to match their yield in line with the reduced interest rates.

Now that the things seem to be stabilising as far as inflation is concerned, interest rates are unlikely to go up from its current level.

In fact, we recently reported that short-term bonds are striking a chord with investors as there a greater probability that the RBI will now pause the interest rates after raising them by a whopping 225 basis points across five monetary policy committee meets.

Quantum Asset Management and Tata Asset Management are reportedly buying debt with maturities of up to five years.

As we paraphrase what we just stated above — it is imperative to invest in the debt funds in order to make your portfolio robust, dynamic and most importantly – diverse.

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First Published: 24 Dec 2022, 11:10 AM IST