Rising rates is bad news for debt fund investors. When the interest rate starts to move up, the price of existing bonds falls which in turn pushes down the net asset value (NAV) of debt funds, translating into lower returns for the investor. As far as debt mutual funds holders are concerned, the impact of rising interest rates is more on the schemes that hold long-term securities compared to those holding bonds which are maturing early.
What to do: While investing in any of the 16 debt fund categories as classified by Sebi recently, look at the ones with a shorter maturity profile. Investors should be allocating to ultra-short term funds and corporate credit funds. These funds are likely to deliver the best returns in the current rate environment and can substantially protect investors from a rise in interest rates
Debt funds with underlying securities with longer holding period may be avoided. Avoid long-term bond funds as they depreciate in a rising interest rate scenario resulting in a potential capital loss
This is what debt fund investors with moderate risk appetite and those who are risk-averse should do:
* Risk-averse investors should consider investing in liquid funds, arbitrage funds, ultra-short term funds and fixed maturity plans at this point based on the current market conditions.
* Risk-averse investors should consider investing in liquid funds, arbitrage funds, ultra-short term funds and fixed maturity plans at this point based on the current market conditions.
* Investors who can withstand some amount of risk and with a medium-term investment horizon should consider investing in high quality fixed-income funds with duration range between 1 year and 3 years via systematic investment plans (SIPs). They should spread their investments over 3 to 4 instalments for six months or so. This may help the investor take advantage of the upward trend in bond yields and help mitigate downside risks.
SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich - Best ELSS Funds
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