Unlike Equity Funds, Debt Funds are considered low risk and are ideal for conservative investors seeking stable returns. They offer liquidity, ease of investment and diversification across various debt instruments. However, Debt Funds are subject to interest rates and credit risk.
Some of the major risks in these instruments/funds are: 1) Interest risk- This is also known as price risk. Whenever there is a change is the interest rates the price of a debt instrument also changes.
Approximately 18 funds offered double-digit returns during the same period. Aditya Birla SL Credit Risk Fund delivered a 12.13% return in the past year. HDFC Long Duration Debt Fund and SBI Long Duration Fund provided returns of 11.91% and 11.74%, respectively, over the last year.
Bond prices and interest rates have an inverse relationship; when interest rates fall, bond prices go up. This results in appreciation of the bond value that the debt funds hold which, in turn, leads to higher returns.
There won't be much impact on debt funds if the equity market crashes because the dynamics of the fixed-income market are very different. What has a bearing on debt funds is the general state of the economy and inflation rates. If inflation goes up, interest rates go up. Bonds are hit if interest rates go up.
It's not too late to join the bond party. If you're still parked in cash or cash equivalents in lieu of bonds—the “T-bill and chill” strategy made popular in 2022—you're losing out on the daily income accrual provided by higher-yielding bonds, as well as the potential price gains as yields continue to decline.
The safety of debt funds depends on the type of debt funds and the interest rate fluctuations. Long-term debt funds may give negative returns when interest rates are rising. Short-term debt funds offer a lower return when interest rates fall. Credit risk funds invest your money in bonds of a lower rating.
DSP Gilt-G
DSP Gilt is a consistent debt fund with decent returns in the last ten years. The fund has no exit load and comes with no lock in period and a moderate risk profile.
Overnight Funds
These overnight instruments are backed by collateral which comprises of Government Securities, and so these funds also have no credit risk. These are the safest debt funds but their yield is usually also the lowest. Overnight funds are suitable for parking your funds for a few days.
High-interest loans -- which could include payday loans or unsecured personal loans -- can be considered bad debt, as the high interest payments can be difficult for the borrower to pay back, often putting them in a worse financial situation.
Debt funds can experience negative returns due to interest rate fluctuations. Funds with longer maturities are particularly susceptible to interest rate risks.
Yes, you can withdraw money from most mutual funds anytime, unless they have a lock-in period.
A general rule of thumb to consider is that if your expected rate of return on investments is lower than the interest rate on your debt, you should pay down debt first. Historically, the stock market has returned an average of between 9% and 10% annually.
Debt funds are better for short-term investments because of their lower risk and potential to offer relatively stable returns, while equity funds are more suited for long-term investments as they entail higher risk but offer higher return potential in the long term.
Utilising the SIP calculator, an investment of Rs 15,000 monthly over a duration of 15 years results in a total capital outlay of Rs 27,00,000. Assuming an annual return of 15%, the projected long-term capital gains are estimated to be Rs 74,52,946. After 15 years, you will get a total of Rs 1,01,52,946.
Looking at the current economic landscape, you can see why now is a good time to invest in debt funds. Potentially, interest rates are stabilising, the risk-return balance is improving, and bond prices seem favourable.
When interest rates rise, debt mutual funds investing in shorter-term bonds are generally more resilient. These funds are less affected by interest rate fluctuations and can provide stable returns. For short-term investments, liquid funds or low-duration funds are suitable.
The trade-offs, however, can include reinvestment risk, lower long-term returns, low to negative real returns because of the effects of inflation, and reduced portfolio diversification when needed most. Normally, bonds with longer maturities require higher yields to compensate investors for additional risks.
You can get your cash for an EE or I savings bond any time after you have owned it for 1 year. However, the longer you hold the bond, the more it earns for you (for up to 30 years for an EE or I bond). Also, if you cash in the bond in less than 5 years, you lose the last 3 months of interest.