Sachin Mehta wants to know if debt funds, like fixed deposits, are also not affected by interest rate changes
19-Feb-2009 •Research Desk
A fixed deposit done at a particular rate of interest is not affected by any change in interest rates during its tenure. Does the same thing apply to Debt funds as well? If not, is it advisable to opt for a short-term debt plan in light of the expectations that deposit rates are going to keep on reducing.
- Sachin Mehta
Unlike fixed deposits, debt funds are not risk-free assured return instruments. They are affected by interest rate fluctuations. Falling interest rates will result in rising prices of the underlying bonds while rising interest rates will result in falling bond prices. So debt funds do better in a falling interest rate scenario.
The higher the maturity profile of a debt fund, the more is its sensitivity to interest rate fluctuations. So short term debt funds are less affected by interest rate outlook than long term debt funds. Liquid funds would be a better option as they invest in short term instruments such as treasury bills, certificates of deposits and commercial papers.