In an increasing interest rate regime, is it worth investing in debt funds?
- Chandrashekhar Agoram
The bond yields have been on the rise since the start of the year and it is not that the RBI has started to increase the interest rates, nor is it expected to do that anytime in the near future, but it has been a global phenomenon and that's because of the concerns around the return of inflation. Also, more locally, there have been concerns around the exceptionally high borrowing program announced by the government in this year's budget. These factors have contributed to the rise in bond yields. Now from hereon, one would hope that the pace of increasing bond yields moderates than what it has been since the start of the year, but one cannot rule out an upward bias on the bond yields. That's why one should avoid investing in debt funds with a longer maturity profile like the gilt funds because they are the ones which get most severely impacted from the rise in bond yields.
For your fixed income allocation, you should stick to the core funds like short-duration funds, corporate bond funds and banking and PSU funds. Otherwise, if you have a very defined time frame for which you are looking to invest, you can also look to pick out a high quality fund which follows a roll down strategy and you can simply look to match your investment horizon with the target maturity of that fund and that greatly reduces the interest rate risk. So those are the kind of things you can do while you invest in debt funds from hereon.