Is It Good Time To Add Debt Funds In Your Investment Portfolio As Interest Rates Are Rising?

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Investment
oi-Shubham Kumar
|

Published: Wednesday, August 10, 2022, 15:36 [IST]

Planning your finances is the secret to building wealth. When we sense that our monthly income isn’t providing the financial security we anticipated, we frequently gravitate toward investment instruments that may be able to assist us in amassing a corpus. Keep in mind that you lack proper financial planning if you find yourself short of cash at the end of every month to cover your everyday costs.

Commodity prices are still rising due to the ongoing Russia-Ukraine conflict, and inflation is still high. As a result, to control the inflation and surge in price rise, the Reserve Bank of India (RBI) in past 100 days has hiked 3 times repo rates, which resulted in a rise in interest rates of various financial products such as Fixed Deposits, Loans, Saving account, and benefited the debt funds.

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What is a Debt Fund?

Unlike equity-oriented schemes that invest in the majority in equity and equity-related instruments, debt mutual funds predominantly invest in debt and debt-related instruments. Fixed income and money market instruments such as treasury bills, call money, debentures, government securities, certificates of deposit, and corporate bonds are invested by these funds. Many people contemplate investing in debt funds to accomplish short-term objectives such as placing a down payment on a new automobile, upgrading their home, organising a foreign vacation, and so on.

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Benefits To Debt Funds

Offers Stability – Your investing portfolio benefits from the steadiness that debt funds provide.

High Liquidity – By investing in debt funds you can withdraw your investment at any given time and get the amount in your bank account within 24 hrs (In most cases). Debt funds come in handy during urgent financial needs as it is a fixed-income investment and not linked with the market up and downs.

Better Returns – Your returns from investing in the finest debt funds will be higher, higher than your earnings from standard savings banks and fixed deposit accounts.

Taxation Benefits – Debt investments are a solid and reliable form of capital. Market risk does not affect them, and there are also few transaction costs.

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Rising Interest Rates And Investments

Rising interest rates impacted both markets, the debt and equity. However, maintaining diversity and performing asset allocation is important while investing to safeguard your investments. You can choose to invest in debt funds with a lump sum or SIP, and the same for the equity.

Every mutual fund serves its unique purpose to the investor. However, most investors invest in debt funds to accomplish their immediate objectives. Additionally, investors who do not have a high tolerance for risk consider debt funds as a possible investment.

Before investing ensure that your investing horizon, goal, and risk tolerance are in line with your investments while making a debt fund investment. Only invest if you believe the plan has the potential to bring you closer to your objective.

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Where to Invest in a debt fund to meet the requirements?

You should invest in shorter-term bond papers while investing in debt funds considering the rising interest rates. In an environment of rising interest rates, debt funds with shorter maturities perform better. Shorter-maturity papers are less impacted by rising interest rates, which is why this is the case.

Thus, you can choose liquid or low-duration debt funds if you want to invest for a very short time, like a few months. For an investing horizon of 6 to 12 months, you can invest in ultra short-term mutual funds.

You can invest in money market funds if you are looking to park money for one- to two years. For an investment horizon of two years or more, you can choose short-term debt funds or corporate bond funds holding shorter duration, high-quality papers.

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Story first published: Wednesday, August 10, 2022, 15:36 [IST]

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