- Date : 02/08/2022
- Read: 3 mins
While debt funds do offer greater long-term security and more reliable returns than other kinds of investments, such as equity funds related to shares, there might be some inherent risk.
What are debt funds?
Treasuries and bond funds are examples of fixed-income assets that debt funds invest in. Some of the investment alternatives in debt funds include monthly income plans (MIPs), short-term plans (STPs), and liquid funds. People who are unwilling to invest in an extremely volatile equities market prefer debt funds. Compared to equity, a debt fund offers a regular but low income. It is less unstable in comparison. You can check the list of Best Debt Funds
What is happening in India in terms of the debt funds?
Throughout the pandemic, monetary authorities across the globe, including the RBI, drastically lowered interest rates to assist in free up cash, fill the economy with liquidity, reduce borrowing costs where possible, and encourage people to spend more. Existing investors benefited when rates decreased on a centre approach. However, the economic recovery has advanced significantly during the last year. The RBI is now faced with the new problem of lowering interest rates to a level that can be sustained to control price increases. However, this will affect the returns from debt funds.
What are your alternatives if the investors have investments in debt funds or aspire to do so?
There are two options for this situation;
- Waiting for maturity
The best approach at the moment might be to wait for the debt fund investment to mature if you are a conservative investor that plans their long-term strategy with fixed returns in sight and a relatively low capacity for risk. Interest rate fluctuations are immaterial because you will receive the same fixed returns predicted ceteris paribus regardless of them.
- Easy draw and how?
Due to higher interest rates, the principle will be slightly reduced, and an early withdrawal penalty will probably be applied. It takes into account these elements, compare the costs to the rewards for relatively short, higher-return investments and takes risk into account.
Returns for Indian debt funds will decrease as a result of the increase in interest rates. This could result in reduced returns for investors trying to exit the market too soon and a likely loss of opportunity for those planning to hold onto their investments until maturation with long periods of funds. There isn't just one method to react to this specific circumstance that is the best. One must be sure to maintain a diversified portfolio in which securities like debt funds are included alongside other securities like bonds as a whole.
Disclaimer: This article is for general information and should not be construed as insurance, investment, tax, or legal advice. You should separately obtain independent advice when making decisions in these areas.