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.
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.
In general, it is mostly best to pay down debt before investing. The risk of investments is usually greater than the risk of paying debt. Investing money that will be matched by an employer is better than paying off debt as you get ``free'' money.
Given the outlook for a shallow rate-cut cycle, investors can consider focusing on funds with durations of 3 to 5 years. After giving mediocre returns during 2021-23, debt mutual funds in India turned attractive over the last one year and delivered high single-digit returns.
Debt mutual funds and fixed-income investments have various risk characteristics. While fixed-income investments are often considered safer due to their fixed interest and deposit protection, debt funds do contain some risk due to credit risk and interest rate risk.
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.
They stay away from debt.
Car payments, student loans, same-as-cash financing plans—these just aren't part of their vocabulary. That's why they win with money. They don't owe anything to the bank, so every dollar they earn stays with them to spend, save and give! Debt is the biggest obstacle to building wealth.
Now, like any other lending/borrowing transaction, even a debt fund purchase can carry risks. Because at the end, it is an interest-bearing security which is being traded in the market.
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.
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.
Which is better debt fund or equity fund? The choice between debt and equity funds depends on individual investment goals, risk tolerance, and time horizon. Equity funds offer higher potential returns but come with higher risk, while debt funds are safer but offer lower returns.
Having too much debt can make it difficult to save and put additional strain on your budget. Consider the total costs before you borrow—and not just the monthly payment. It might sound strange, but not all debt is "bad." Certain types of debt can actually provide opportunities to improve your financial future.
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.
However, investment in a dynamic bond fund for an equal tenure will offer higher returns than the bank FD. Investors also have the option of a Monthly Income Plan if they want monthly payouts akin to interest on FDs.
Liquidity: Debt funds feature high liquidity, with speedy redemption, usually within one or two working days. Unlike fixed deposits, there's no lock-in period, but some funds may impose minor exit costs for early withdrawal.
Debt Mutual Funds cover a wide range of debt securities and each security is affected by the changes in interest rates. As a result, the best time to invest in Debt Funds is usually when interest rates are decreasing or expected to drop.
Essentially, this 'rule' states that (for most people) paying down debt of 6 per cent or higher should be done before making any investments. If your interest rate is less than 6 per cent, it may make sense to invest your extra money into investments for the future.
Investment Process
This money is their capital. They use this capital to buy fixed-income securities like bonds and money market instruments tools. These securities pay interest over time. The fund manager collects this interest.
Others will object to taxing the wealthy unless they actually use their gains, but many of the wealthiest actually do use their gains through the borrowing loophole: They get rich, borrow against those gains, consume the borrowing, and do not pay any tax.
And even for people who may not be able to leverage a Dali painting hanging in their foyers, debt can be a useful tool to keep their wealth engines running if it comes cheaply enough relative to other opportunities, keeps their assets working for them and, above all, if the risks are understood and tolerable.
Ninety-three percent of millionaires said they got their wealth because they worked hard, not because they had big salaries. Only 31% averaged $100,000 a year over the course of their career, and one-third never made six figures in any single working year of their career.
Most bonds are issued in $1,000 denominations, so typically the face value of a bond will be just that – $1,000. You might also see bonds with face values of $100, $5,000 and $10,000.
While lower-rated bonds have been strong performers in 2023, we think the market is going to be more discerning as we head into 2024. We expect higher quality bonds will be the best bond performers over the next year. We also think performance will be more dispersed than it has been.
There are many reasons to consider adding gold to your investment portfolio. The precious metal has a history of maintaining its value, making gold a useful hedge against inflation. Gold prices tend to increase when the U.S. dollar is underperforming or during times of economic and political uncertainty.