Essential steps to be taken by debt investors as yield rises

Whenever the interest rates go up, it impacts both the equity as well as the debt market. However, investors who invest in debt funds for the long term might be able to save their portfolios from getting affected. We know that when the yields go up, it affects the Net Asset Value (NAV) of the debt mutual fund. The interest rates are not low just in India, but they are at an all time low globally as well.

Let us understand more about debt mutual funds and how investors should use them for diversification.

What is a debt mutual fund?

A debt mutual fund is an open ended mutual fund scheme that invests the majority of its investible corpus in fixed income securities and money market instruments. Some of the debt related instruments in which the debt fund invests are government and corporate backed securities, debentures, treasury bills, certificates of deposits, CBLO, reverse repo rates, etc. Debt funds try to offer stability to the investor’s portfolio and capital protection whilst generating regular income.

Features of a debt fund

Here are a few things that make debt mutual funds unique:

Averse to equity market volatility – Any fluctuations in the equity market directly impact the performance of an equity mutual fund. But since debt funds do not invest in the equity market or company stocks, their performance does not get affected by any volatility the equity market witnesses. This is why a lot of risk averse investors consider debt mutual funds as they are afraid of losing their hard earned money in the equity markets.

Debt funds come in different types – Currently, there are 16 different debt mutual fund products that investors can choose from. Debt funds can be largely categorized as short term debt funds and long term debt funds. Short term debt funds like liquid funds, overnight funds, ultra short term funds, etc. invest in a portfolio of securities that mature in a short period. On the other hand, debt funds like gilt funds, long duration funds, etc. invest in a portfolio of debt instruments that have a longer maturity period. There is a debt fund to outfit the investment needs of almost every type of individual.

Feasible expense ratio – Debt fund investors will have to pay something called an expense ratio, a fee that encompasses several recurring expenses like management costs, fund operational costs, etc. Market regulator SEBI has capped expense ratio at 2.25% which means that any AMC cannot levy a higher expense ratio than that. However, since debt funds do not generate returns as high as equity funds, they usually have a relatively low expense ratio.

How to invest in debt funds?

Investors can invest in debt funds either by making a onetime lumpsum investment or through the Systematic Investment Plan option. However, do remember that not all debt funds have an SIP option. Or the SIP facility for debt funds may vary depending on the fund house of third party mutual fund aggregator you choose to invest with. A Systematic Investment Plan allows retail investors to save and invest a fixed sum regularly in any debt scheme of their choice. Investors can use the SIP calculator, a free online tool to calculate their total SIP returns.

Debt funds might be a safe option as compared to equity funds, but they do not guarantee returns. Hence, investors must seek consultation with their financial advisor before investing.

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