Investing in debt funds is a top pick among plenty of investors because they have the potential for stability and require less risk compared to investments into equity. Developments within the world of debt funds have been a mixed bag over the last several years, with some categories performing worse than others. Going forward, the natural question that arises is which debt funds could give higher returns than what we have seen over past 2-3 years?
What is this scenario all about?
Apart from the usual backdrop, what we have seen in the Indian debt market over the recent past is a period of enormous change. Lately, the movements of interest rates and bond yields in India have been influenced by the series of actions taken/in a pipeline from Reserve Bank of India(RBI) to tackle inflation as well as boost up economic growth. As such, the performance of various categories of debt funds have been dictated by these factors over the previous year or so.
Take Notice of These Debt Fund Categories
Although the past does not guarantee that you will continue to earn such returns, many debt fund categories are likely to remain in good shape in the coming years according to current market scenarios and long term trends.
Long-Term Debt Funds:
Gilt funds: They mainly invest in government securities, which is one of the least risky debts. Since interest rates are unlikely to rise anytime soon, gilt funds stand to gain capital appreciation as the prices of bonds go up.
Long-Duration Funds: These are the funds, which park their money in long maturity bonds & when interest rates fall, higher returns can be expected. But that also makes them more sensitive to interest rate changes. Moreover, these investments will be subject to long-term capital gains tax on the profits made if held for more than three years, affecting investors’ net returns.
Criteria For Askings Debt Funds Selection
Investors must keep the following in mind while choosing debt funds:
Investment Horizon: The duration for which you will be investing will help decide the category of debt fund to choose.
Risk tolerance: How comfortable are you with risk? This will help determine which type of fund is best for you.
Desired Level of return: This will determine your asset allocation.
Expertise Of Fund Manager: For any debt fund, performance is subjective to the skill of the fund manager.
Diversity: Holding a combination of assets can build in some level of risk management.
Conclusion
Last few years were tough for many of the debt fund categories, but with right bets debt funds will offer opportunity in future as well. Just be mindful of your investment objective, risk profile and how the market plays out so you can choose the suite of debt funds that will end up with relatively better returns than the past couple of years.