How would the different types of debt funds perform under the falling interest rate scenario? Would the returns diminish for all debt funds, or are there categories which will give better returns?
-Mr Ghosh
The whole turnaround in the interest rate cycle has different implications for different types of debt funds. Since the rates are coming down, short-term debt funds and liquid funds will yield lower returns. FMPs will not be attractive anymore, because locking in your money doesn’t make sense now. On the other hand, income funds, which were ignored all through the rising rate regime, will become attractive. Since the value of bonds go up when interest rates come down, dynamic bond funds stand to benefit the most.
This article was originally published on April 24, 2012.
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