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July 3, 2022

What should investors in debt funds do as yields start rising?

May 25, 2022

While investing in the market, you come across mutual fund schemes as one of the possible investment options among several available. But before deciding to invest in a mutual fund scheme, it is important to remember that mutual funds are not a monolith. There are numerous types of mutual funds available in the market. One of them is debt mutual funds.

If you don’t know what debt funds are, don’t worry in simple terms, they are a subcategory of mutual funds that generate income in securities that are known for generating fixed income. These securities include things like corporate bonds, government securities, commercial papers, treasury bills and numerous other money market instruments. These instruments come with an already decided maturity date and the revenue earned from these schemes is usually not affected by the market fluctuations.

In debt funds, a debt fund manager usually invests in assets after studying the credit rating of an asset. A high credit rating is indicative of the fact that debt security has a higher chance of repaying the interest and principal. Apart from that, the manager regularly aligns the investment strategy as per the interest rate movements.

Regularly, investors usually redeem their debt investments when the revenue earned from the scheme is high and opt for an equity fund. However, instead of redeeming your debt fund, you can do the things listed below:

  • Continue investing in debt funds:

One of the first options you should consider is to continue investing in the debt fund scheme. It is understandable when your yields show growth, you are tempted to redeem your debt fund and look for other investment avenues. While yields rising may have some impact on an investor’s net asset value (NAV), there are numerous advantages to keep investing in a debt mutual fund scheme. Consider this scenario. You are currently experiencing growth in your debt fund investment. You may be tempted to redeem your debt fund scheme. But before, going ahead and withdrawing from the scheme, you should determine whether the benefits of redeeming the debt fund outweigh the benefits of continually investing in it. If you were to continue investing in the debt fund, you may enjoy tax benefits.

  • One may opt to invest in commodity funds:

Commodity funds are known for investing in raw materials i.e., primary agricultural products, that are referred to as commodities. They invest in things like precious metals, such as gold and silver, agricultural goods, such as wheat and energy resources, such as oil and natural gas. Moreover, commodity funds may also invest in the companies that produce the commodities mentioned above. They come with advantages like potential financial growth, protection against inflation and portfolio diversification. However, as is the case with all types of investment opportunities, commodity funds carry some risks and may not be right for every portfolio. For example, commodity markets can be volatile and therefore they can expose investors to the possibility of considerable price fluctuation. Moreover, commodities and even commodity companies are also exposed to things like political, economic, foreign currency and exploration risks.

  • Consider Investing in an NFO:

When an AMC issues units for the first time or raises fresh funds for a new theme, it is referred to as an NFO i.e., a new fund offering. Most of the time, retail investors prefer an NFO over buying mutual funds via the continuous window from the AMC. In recent years, SEBI has become stricter with respect to the criteria for issuing NFOs and AMCs are not allowed to issue NFOs on duplicate themes. An NFO is issued either because the AMC wants to raise funds for the first time or because there is a new category of fund where the AMC does not have exposure.

If you are still considering redeeming debt funds, you can do so. But before taking any action, it will be better to contact a financial expert.

Disclaimer: Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

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